With your first credit card in hand, it's tempting to head to the mall to buy everything you've always wanted. (Or at least everything your new card limit will cover!) However, a credit card is a promise to pay at a future date – regardless of whether you have the money, or how long it will take you to earn it. First-time credit card users can rapidly find themselves in debt with a severely damaged credit rating, requiring years to rectify.
We don't discourage credit card use – it is important to build a good credit history while you are young. The key word is "good".
Here are some tips to building a solid credit history:
- Use Your Card Regularly For Small Purchases – If you have a credit card but don't use it, you cannot establish a positive credit history.
- Pay Promptly and In Full – It is extremely important to pay bills on time. Also, do not charge more than you can afford to pay at the end of each monthly billing period. If you don't carry a balance, the interest rate on the card doesn't matter.
- Start With a Low Credit Limit – As a first time credit card holder, companies are not going to offer you a large credit limit anyway, but it is best to keep it around $1,000 or less.
- Stay Well Below Your Credit Limit – This is a challenge, especially with a low credit limit, but creditors pay attention to your credit utilization (how much of your credit limit you use, whether or not you pay it in full). Try to stay at 10-20% until you establish a good history, and below 20-25% thereafter.
- Don't Opt-In for Over-Limit Fees – These allow you to charge a little beyond your limit, instead of having your card declined. You will be charged extra fees, and your credit rating is affected. Besides, if you are using your card responsibly, you shouldn't be near the limits anyway.
- Keep your Number of Cards Low – Multiple cards mean multiple temptations, which can lead to running up your debt load quickly. This will likely damage both your psyche and your credit rating. Worse yet, merely applying for a large number of cards can damage your credit score, as each application initiates a credit check. So be smart and stick to one or two cards while establishing yourself in the world of credit.
- Keep Track of Purchases – Most cards allow you to do this online. Not only does this help you keep track of expenses, it allows you to notice any signs of identity theft. Usually this starts with a small purchase to verify the card works.
- Avoid Cash Advances – Using a credit card to get cash is not a good idea. Interest rates (and temptations) are high.
- Protect Your Information – Beware of phone scams or e-mail phishing asking for your credit card number – your credit card company will never ask you to verify your number this way. If you are making online purchases, do so from a secure site. In addition, never let others use your card, for any reason.
How do you decide which card to acquire? If you are young, you probably have more credit card solicitations than your mailbox can hold. Ignore low introductory interest rates (which disappear quickly), and instead focus on rewards (cash back, etc.). Don't let moderate fees or a higher interest rate scare you away from good rewards, especially because you plan on maintaining low card balances. It’s also smart to try the bank where you already have an account, as you may get a package deal.
If you use your credit card regularly for small purchases, pay it off in full and on time, protect your information, and avoid overspending temptations, you are well on your way to a stellar credit rating. Congratulations!
If you want more credit, check out MoneyTips' list of credit card offers.