Don’t overcharge, pay in full by the end of the month; rinse and repeat
Personal Finance Writer
Specializes in mortgages, credit and credit scores
Getting a credit card, and using it properly, is the best way to build a good credit history.
The key is that “using it properly” part. It’s all too easy to rack up too much card debt, miss payments and devastate your credit score when you get your first card.
First-time card users often fall into the same traps. To make sure you don’t, avoid these mistakes that people often make the first time they get that plastic.
See related: First credit card dilemma: Student card vs. secured card
1. Rack up debt you can’t pay off each month
Atiya Brown, an Orlando, Florida-based certified public accountant and founder of the Live Financially Savvy podcast, said that she works with many clients who are still paying off credit card debt they racked up in college.
That’s because many people still get their first cards as college students and often misuse them by buying items they normally wouldn’t if they only had cash to spend.
“They are not conscious of what they are spending their money on,” Brown said. “If they normally would have used cash to buy food, they’ll use their credit cards and buy more food than they normally would.”
It’s easy for students, in their free-spending ways, to build enough credit card debt so that they carry a balance at the end of each month. Because of the high interest rates that come with cards, this debt grows quickly.
“They get into this vicious cycle of always having to make credit card payments each month,” Brown said.
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2. Make only the minimum monthly payment
It’s true that making the minimum monthly payment on your credit cards won’t cause your credit score to plummet. But paying only the minimum is a good way to cause your credit card debt to soar over time and damage your credit score as your balance balloons.
That’s because paying only the minimum does little to reduce your overall credit card debt. Depending on how much debt you’ve run up, it could take you years and hundreds of dollars in interest to pay off your debt by only making the minimum payment.
- Say you owe $1,000 on a credit card with an interest rate of 19 percent.
- If your minimum monthly payment only covers 1 percent of your debt plus interest, it will take you 115 months – nearly 10 years – and almost $1,000 in interest on top of what you already owe.
- And that’s only if you don’t add more debt to your card while you’re making those minimum payments.
Kyle Whipple, financial adviser at C. Curtis Financial Group in Livonia, Michigan, said it’s easy for first-time card users to rack up enough debt so that they can only afford that minimum monthly payment.
“If you can only spend $500 a month, then you shouldn’t be charging more than $500,” Whipple said. “People too often have no pre-set plan on how they will pay off their debt. They say they’ll take care of it later. And when later comes, they just make that minimum payment again.”
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Tip: Always pay more than the minimum. This will dramatically lower the amount of interest you pay on your debt over the years. Even better? Pay off your balance in full each month. This way, you won’t be stuck with interest payments at all.
3. Treat credit cards as free money
Maggie Germano, owner of Maggie Germano Financial Coaching in Washington D.C., said that it’s far from unusual for people to overspend once they get their first credit card.
That’s because spending is naturally constrained when consumers are relying on cash to make purchases. You can’t buy more than you can afford because you’ll run out of cash.
Because of this, consumers put more thought into every purchase when using cash, Germano said. That careful planning often disappears, though, when they move to credit cards.
“When you are using a credit card, you don’t have to think about how much money is in your bank account, though you should,” Germano said. “You figure, ‘I can buy that random thing being advertised to me. Why not?’ It’s like free money when you have a credit card.”
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4. Missing credit card payments
This is one mistake that can devastate your credit score: You either become too overwhelmed with debt to make the minimum monthly payment or you forget to do it altogether.
A single late payment – one that is more than 30 days past its due date – can cause a FICO credit score to plummet by 100 points or more. And this missed payment remains on consumers’ credit reports for seven years.
“Payment history and utilization are the biggest factors in a credit score,” Brown said. “College students are likely to run up their debt, using too much of what’s available to them, and then miss their payments. This can lead to big credit score issues.”
Tip: Set up automatic payments on your account. If you’re not sure you’ll have enough funds in your bank account to pay the balance in full by the end of the month, set up automatic minimum payments. While you’ll carry a balance over to the next billing cycle and incur interest, you will at least ensure not to miss a payment and hurt your credit.
5. Focus too much on rewards while ignoring interest
Germano said credit card companies’ rewards credit card pitches often entice first-time credit users, who dream of racking up big cash back bonuses or an unending stream of airline miles.
The danger happens when they choose cards solely based on rewards, Germano said, and fail to consider the interest that comes with these cards.
Then, when they charge too much in an effort to earn rewards points, they are left with a balance they can’t pay off at the end of the month. This leaves them with big interest payments that easily outweigh any rewards points or cash back bonuses they’ve earned, Germano said.
“Interest rates can be far higher than the cash back if you don’t pay off the balance each month,” Germano said.
In fact, the national average APR for rewards credit cards currently stands at 16.99 percent. By comparison, most rewards and cash back cards offer a rewards rate of 1 to 3 percent.
See related: Credit card glossary to know for first-time card users
The key to getting the most out of your first credit card is to use it wisely. Charge only what you can afford to pay off each month and you’ll steadily build your credit score.
You’ll also prove to lenders and financial institutions you are a creditworthy consumer. This can lead to lower interest rates on auto, mortgage and personal loans and offers for better credit cards.
Just remember: Always pay your credit card bill on time and never charge more than you can handle.
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