The most important thing that you should know before you even get started is that credit cards are a loan, not free money. You’re going to be required to pay that money back and that’s why it’s so important that you don’t spend more money than you can afford.
Those who don’t take care to spend responsibly are going to have a lot of problems with their credit score later on and that credit score affects a lot.
Now, if you know how to use them properly you can get some great benefits from your credit card. You can get rewards and cash back and even improve your overall credit score. You just need to make sure you’re doing a little work and comparing things like benefits and APR before you jump in.
So, let’s get into our best tips to help you use those credit cards the right way.
1. Use Credit Cards to Build & Improve Your Credit Score
If you know how to use your credit cards properly you’ll be able to actually increase your credit score.
That will allow you to get even more credit in the future. But you have to make sure you’re following the right steps and that starts with paying your balance in full every month. For those who don’t have credit yet or for those who have bad credit already it’s a good idea to start with a secured credit card that will help you along.
Now, for those who are just starting to look for a job and don’t have any credit you absolutely still have options. You have the ability to open a student credit card, for example, even if you don’t have an income. You’ll need to be a student and have a parent co-signer, but these can help you immensely.
For those who aren’t attending school you can possibly get a secured card. That secured card will allow you to put a deposit into an account and then you’ll be able to spend that amount of money on the card. You actually get a review from the company in charge of the credit card and they can transfer your card to a standard credit card at a later point. So it’s like riding your bike with training wheels before you get ready.
2. Choose The Right Card For You
You should know that getting one credit card is not the same as getting another one.
You need to do some research and make sure that you’re getting something that works for your needs. This could mean a cash-back card that’s able to be used anywhere if you tend to use cards at different places.
For those who do most of their buying at one place, you could get a card that will give you the most rewards at that place. If you aren’t so good at paying off your debt every time you may want to look into lower interest rate cards. And so on.
3. Know What You Can Afford
“Credit card debt is very expensive, so make sure you're able to pay your monthly bill” says Yosi Rahimi, MoneyCompass’s Founder.
It can get tempting to just keep spending on your credit card and assume that you’ll pay it off later, when you’ve graduated. Unfortunately, you can end up extremely far in debt before you get the money to pay these things off. And when 30% of your credit score will come from the amount of debt that you have. If you’re not getting that card paid off every month you’re going to have a lower credit score.
“Do you think that your student loan interest is a killer? Your credit card interest could be 5 times higher! Make sure that you can afford your monthly purchases and pay your bill in full and on time”, says Rahimi.
You want to make sure that you aren’t getting into the cycle of more debt and more problems.
Instead, make sure you pay attention to how much money you can afford to put back on that credit card each month and go from there. You’ll need to keep track of how much you spend and how much you make in order to make this work. And you’ll need to follow that limit. Don’t get sucked into overspending no matter what it is you want to buy.
4. Watch the Fees
You’ll find that there are all kinds of fees associated with your credit card and you need to be aware of them. In fact, research has found that interest and fees cost Americans over $163 billion in 2016. And that’s exactly where credit card companies are starting to make more money off of you.
You want to make sure that you know where the fees come from, how they can be charged and definitely how much they can be.
Annual fees could be $95 to $200 or they could be $1000 or even something higher. Luckily, you don’t have to get a credit card with these types of fees. You can get cards with no annual fees or you can get annual fees waived in some cases if you talk to the company. You just have to make sure you’re aware.
5. Don’t Look for an Easy Out
Once you get out of the house it’s up to you to take care of your own fees and your own credit cards. That means you shouldn’t be relying on your parents to do these things for you.
After all, they have their own things they need to pay for. If you do ask them for help or you do ask them for a loan you’ll want to make sure that you’re doing everything you can to come to an agreement in order to take care of things, immediately.
6. Make Payments Automatic
If you set up automatic payments you don’t have to worry about things like ‘I forgot.’
This is going to make it easier for you to stay on top of things and make sure that your bills are getting paid. In fact, you get to set up the right date and then you get to link them to your bank or to a credit card (as long as you pay it off every single month).
If you make payments through the online account of your bank you can make sure that you’re never late. And you can also make sure that you don’t have to go through late arrival for those bills you mail out. Plus you have the level of recordkeeping that you actually need.
7. Use Balance Alerts
If you have the balance alert activated on your credit card you’ll get a text if you spend more than a preset amount on your card. This can make sure that you know what you’re getting into and that your statement isn’t going to look worse than you expect.
These limits can be set on your own or they can be set by the company themselves. The best way to go is to keep it around 30% of the total limit on the card.
8. Keep Your Credit Utilization Low
You never want to max out the amount of money your credit card offers you. Rather, you want to make sure you have a balance of less than 40% on your credit line at any specific time. If it's not the situation – you should work on lowering your credit utilization rate.
If you have a high balance you’re also going to be paying a lot more on interest and that’s going to keep building up and up.
9. Prioritize Repaying High-Interest Debt Over Other Spendings
According to Rahimi, repaying your high-interest debt is much more important than almost anything else.
“That is easier said than done for many, but it is very important to stay on top of your finances if you carry credit card debt. Sometimes carrying credit card debt is inevitable, however, having a plan on how to repay it as fast and cheap as possible could help reduce the stress associated with carrying debt and save a lot of money in interest payments”, says Rahimi.
10. Avoid Late Payments
Late payments are going to make a big difference on your bills because they’re going to rack up the bills. You’re going to end up with late payment fees, fines, penalties and interest charges. You’re also going to have problems with your credit report and credit score as a result.
For those who struggle to make payments on time you can set alerts for your phone that will make sure you’re notified before it happens. You’ll also want to put something on your calendar to help you. You’ll also want to take a look at online settings to see if you can make automatic payments on your bills instead. This will keep everything from being late.
11. Use a Secured Credit Card to Build Your Credit
For those who have no credit or would have a problem getting credit you can definitely get a secured card. These allow you to start building up a credit score, which is going to make it easier for you to get the loans and other types of credit that you need later on.
Just make sure that you make all of your payments on time or you could end up in more trouble rather than improving anything.
12. Don’t Get a Cash Advance
Cash advances may sound great because they give you the opportunity to take out cash, but that actually makes things worse instead of better.
“Don't use credit cards when you can use student loans”, says Rahimi. “If you absolutely have to use debt to finance your tuition or living expenses, make sure you've exhausted your federal student loan options. It will be much easier to pay back these loans than repaying your credit card revolving debt.”
You want to make sure that these cash advances are avoided at all costs because they have a whole lot of fees and they have immediate interest charges when you pull the money out.
13. Analyze Your Spending Effectively
Did you know that your online banking system likely has a feature that will look at where you’re spending money and just how much you’re spending. It pays attention to the different categories that people spend in, like restaurants or travel. Even better, you can take a look at your patterns and you can also take a closer look at your monthly spending.
When you get into the online system make sure that you pay attention to what’s available and definitely check out this spending tool. You’re going to be more than happy with the way it helps you stick with a budget.
14. Protect Your Identity
Going online is going to make it difficult to keep your identity private, but you need to do everything you can.
Change out passwords and even usernames for some of your favorite sites. You should be doing this relatively frequently and you should never write down the passwords, or if you do you should make sure you keep them locked up. Also, make sure that you don’t have saved logins on your devices because they can easily fall into the wrong hands and then you’re in big trouble. Make sure you’re not providing information over the phone whenever possible either.
15. Keep an Eye on Credit Reports
You want to make sure that you’re paying attention to your score and everything that your report is saying. For example, a lot of people think that they can get a higher score a lot faster if they start opening up a lot of accounts. That’s definitely not a good idea because it’s actually going to make it even harder for you to keep your credit score where you want it.
The key is understanding the difference between a soft and hard inquiry.
A soft inquiry happens when you get prescreened for an offer and it doesn’t hurt your score. A hard inquiry, which happens when you authorize a business or entity to check your credit score does affect you.
And that hard inquiry affects your score whether you get the credit or not. The reason is that it looks like you’re applying for too much and that you may just be trying to pay off expenses you can’t afford.
Keep in mind that an inquiry, and specifically a hard inquiry, can account for approximately 10% of your total credit score. And the more hard inquiries you have the worse it’s going to look. That could actually affect your credit score by quite a bit, lowering the score by several points. And that could mean that you don’t get the approval that you’re looking for, especially when you’re trying to get a loan or a specific type of credit. You look like you’re not solvent or like you don’t have any other way to pay off your expenses when you start applying for too many things and start lowering your credit score over and over with those hard inquiries. You want to avoid this if you need any type of credit.