Credit cards can be extremely helpful tools for managing finances, and getting one for the first time can be exciting. But there’s a lot of responsibility, especially if you’re looking to build good credit.
Understanding how to best use credit cards is essential for your success. From paying your bill to taking advantage of your card issuer’s credit management tools, these strategies for first-time cardholders may help you effectively stick to your budget and build a good credit history.
Pay your bill in full each month
One of the most important parts of using a credit card is making on-time payments. Payment history is a significant part of your credit score, and late or missed payments can negatively affect it. Paying the minimum payment each month will keep your account in good standing, but paying off the full balance will offer an additional benefit.
Carrying a balance from month to month results in the card issuer charging interest on the remaining balance. Over time, this interest adds up and can lead to a cycle of long-term debt accumulation. However, paying your bill in full each month may help you avoid interest charges on the borrowed money.
Set up autopay
It’s essential to make your payment on time each month. Missing payment due dates can result in late payment penalties, higher interest rates, and damage to your credit score. A single late payment can remain on your credit report for years and signal to lenders that you’re a higher-risk borrower.
One of the best ways to avoid late payments is to use your credit card’s autopay feature. Keep your payments on time by setting up automatically scheduled payments from your bank account. You can choose to set up your automatic payments for the minimum payment, full statement balance, or a fixed amount.
Setting up autopay for the full statement balance is recommended for first-time cardholders to support a positive payment history and avoid interest charges.
Keep your credit utilization low
Your credit utilization ratio is the percentage of your total credit limit you’re using. To calculate it, divide your current balance by your total credit limit, then multiply the result by 100. For example, let’s say your credit limit is $1,000 and your balance is $300. In this case, your credit utilization ratio is 30%.
Credit utilization ratio is used in part to determine your credit score, and experts recommend keeping it low, usually under 30%. A lower credit utilization ratio may help you keep a balance that’s easier to repay and show lenders that you use your credit card responsibly.
Use your card only for purchases you’d make with cash
Another great tip for first-time credit cardholders is to treat your credit card like a debit card. This means only using your credit card for purchases you would normally make with the cash in your bank account.
Viewing your credit card as a debit card may help you avoid unnecessary debt. If you don’t have the money in your bank account right now to purchase something, it may mean you can’t afford it.
Using your credit card in this way may help you pay off your full balance each month, avoid interest charges, and build a healthy credit profile.
Don’t use your credit card for a cash advance
A cash advance is when you use your credit card to withdraw cash from an ATM or receive cash directly from your credit card account. This is one of the most expensive ways to use your credit card. When you get a cash advance from your credit card, the card issuer typically starts charging interest on the advance immediately.
Beyond interest accruing immediately, many card issuers also charge a cash advance fee, which is generally a flat fee or a percentage of the amount withdrawn.
Additionally, the interest rates on cash advances are typically higher than standard credit card purchases. This can become expensive if it’s not paid off right away. Instead, only use your debit card to withdraw money at your bank or a fee-free ATM in its network.
Use your card’s spend tracking tools
Most cards offer tools to track and manage spending, helping with budgeting. Card issuers generally offer in-app tools or website dashboards to share breakdowns of your spending, payment history, rewards, and more.
You can use these tracking tools to see how much you spend in certain categories, such as dining, entertainment, gas, travel, and groceries. These tools may help you assess how well you’re following your monthly budget and keep your spending on track.
Stay smart with your spending
These are just some strategies for responsibly using your credit card, and by using them, you may find it easier to manage expenses, avoid interest and debt, and build a strong credit history.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of thestrategystory.com or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
