So, your credit worthiness is such that you have at least one card in your wallet. Good for you. When used wisely, credit cards can be helpful and convenient tools. They can also help you build a credit history. But did you know there is a right way to use credit cards? If you don’t, you’re not alone.
Here are some tips for using credit wisely.
Choose a Card that Works for You
Factors you should consider when selecting your first card include your spending habits, if there is an annual fee, and would benefit from earning cash back on groceries or gas, or are hotel and travel discounts a priority. You want to determine which potential rewards card would work best for your lifestyle.
Your First Credit Card
Excited though you may be about your first card, resist any urge to charge away. The smart move for the first several months is to use your plastic for small purchases such as a recurring bill or subscription. Then pay off the balance every month. Your aim is to establish a good credit history as well as good spending habits. Never use all of your credit limit. This frowned-upon practice is called “maxing out” your card.
Now Make Larger Purchases
Once you have been carefully using your card for around six months, you are likely ready to start making somewhat bigger purchases. Be sure not to spend more than 30% of your credit limit, since your credit utilization ratio accounts for 30% of your overall score.
Put cash away to cover your purchase when the bill comes due or as soon as the transaction’s processed. This might sound counterintuitive; after all, why would you use the card if you have the cash?
Your payment history comprises 35% of your credit score. Your issuer will notice your charging habits and may increase your credit limit if you always pay on time. Further, paying your balance off each month enables you to avoid paying interest, which can quickly add up.
Practice Restraint
Resist the urge to charge more on your card than you can afford to pay off when the balance comes due. Don’t make additional charges on the card until you’ve paid off the balance. If you must, leave the card at home.
Remember, the purpose of your credit card isn’t to purchase things for which you don’t have cash. Rather, it’s to help you establish a positive credit history and spending habits.
Start With a Single Card
Restricting yourself to just one card can help you manage payments better. Multiple cards, with their varying payment amounts and due dates, could cause confusion and result in you missing a payment. This is bad for your credit score.
After a year or so, you apply for more credit. But don’t close that first card, as the length of your credit history comprises 15% of your credit score.
Regularly Check Your Activity
It’s a good idea to monitor your charges and payments weekly, if not every day — especially if you have been regularly using your card. This way, you can get ahead of any potentially erroneous, or fraudulent charges.
It’s a privilege to use cards and manage credit, and there’s a right and wrong way to do so. Using credit cards the right way can help you build a great credit history that will serve you well throughout life.
