Using your first credit card to create lifelong habits

Using your first credit card

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Credit Sesame on how using your first credit card the right way can help create lifelong habits.

Getting your first credit card is a big step in life. It can make paying for things convenient, and can be seen as a true sign of adulthood.

How you use your first credit card can set the stage for your financial future. It’s up to you to decide which path you’ll take. Will you pay your credit card bill on time and in full each month to avoid paying interest, and build your credit history and grow your credit scores? Or will you pay the bill late and start other bad habits that damage your credit scores?

The higher your credit scores, the more likely you are to qualify for loans with the best terms and lowest interest rates. Buying a home or car may be easier and cheaper if you have good credit habits. A good credit score can also make it easier to rent a home, get a cell phone plan or start utilities without paying a deposit.

If your credit score is excellent, you are likely get asked by credit card companies to open a high-end card that has a great rewards program.

Here are some of the best ways to use that first, shiny card to create good lifelong habits:

Pick a card that meets your goals

Your first credit card may not have all of the benefits you want, but remember that credit is a lifelong habit. If you’re looking for incredible credit card benefits such as award miles and concierge services, it may take years and perhaps a hefty annual fee before you qualify.

It can pay off to shop for your first credit card and not accept the first offer that arrives in your email or mailbox. Find the best interest rate available. If you ever have too much debt on a few credit cards, look for a card with a 0% introductory APR period so you can consolidate those debts and pay them off without interest. 

Using your first credit card right from the start

The training wheels for your first credit card can be a few small charges that you know you can pay off completely when the bill arrives in about a month.

A small, recurring charge such as a subscription to a streaming service is a good start to learning how credit cards work, and is an affordable way to get a monthly credit card bill.

Pay on time

Paying all of your bills on time is the best way to improve your credit score, and your credit card bill is a regular bill that the credit reporting agencies will check to see if you pay it on time each month. Payment history accounts for 35% of a FICO credit score.

Lenders like responsible borrowers. Starting a history of on-time payments with your first credit card shows how responsible you are. Late payments stay on a credit report for seven years and hurt a credit score.

Pay balance in full each month

Making the minimum credit card bill payment on time can improve your payment history, but a better way is to pay off the balance completely each month. This helps you avoid interest charges and falling into debt, and keeps your credit utilization ratio low.

Keep a low credit utilization ratio

A credit utilization ratio is the amount of credit you’re using compared with the amount of credit you can access. A low ratio is seen by creditors as a sign that you have good control of your money and aren’t using too much of your available credit. Credit utilization accounts for about 30% of a FICO credit score.

The ratio is calculated by dividing your balance by the card’s limit and multiplying by 100 to get a percentage. If you have a $2,000 balance and your credit limit is $10,000, your utilization ratio is 20%. Keeping the ratio under 30% is a good goal, and under 10% for the best chance of improving your score

Here are some ways to lower credit utilization:

  • Pay down credit card balances.
  • Keep card balances down
  • Ask for an increase in your credit limit.
  • Do not spend up to any new credit limit

Keep accounts open

It’s tempting to close a credit card after paying off a high balance. You may never want to see that card again. But it can help your credit score by showing a long history of responsible credit management, including paying off a credit card balance. Length of credit history accounts for 15% of a FICO score.

However, you may want to close an account if the card’s terms aren’t beneficial to your finances and credit. If you want to keep a longtime card open but it has an annual fee, ask the lender if the card can be downgraded to one without a fee.

Watch out for fraud

Checking your credit reports for free at least once a year is a good way to protect your credit card from fraud and identity theft. It also helps find fraud in other areas, such as with your daily banking accounts and investments.

Check your reports for fraudulent activity such as new accounts in your name that you didn’t open. Also look for simple errors such as misspelled names and wrong addresses.

Credit Sesame has free credit monitoring with real-time alerts for important changes made to your TransUnion credit report.

Don’t open a bunch of cards at once

Don’t open multiple credit accounts at around the same time, which can make you look more risky to lenders. Hard inquiries done by lenders when you apply for credit cards hurt your credit score a little every time one is initiated.

Stick with one credit card for a while and space out new credit applications by at least six months per card.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Aaron Crowe
Aaron Crowe is a freelance journalist who specializes in personal finance topics. He has written for Wise Bread, AOL, AARP, Bankrate and other websites that focus on financial literacy and saving money. He has also worked as a newspaper reporter and editor. You can follow him on Twitter @AaronCrowe.

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