Summary:
- The purpose of your first credit card should be to build credit.
- Key factors such as paying on time and using 30% or less of the credit line are critically important for your credit score.
- Starting good habits now will help you stay disciplined and keep your debt low.
Congratulations on your first credit card! Getting your first credit card can be exciting and daunting at the same time. It’s a great opportunity to start fresh and establish good credit habits.
Your first credit card can be very important in helping you build strong credit, which can unlock new opportunities for yourself. Your credit isn’t just for buying a car or home, many employers now do credit and background checks as well.
Here are some things to keep in mind as you start to embark on your credit journey so your first credit card can be the first step in helping you grow your score.
Pay on time every time
The biggest factor that impacts your credit score is your payment history. It makes up about 35% of your score.
While we encourage you to not spend more money than you can afford each month to keep your debt and credit utilization (more on this below) low, it’s likely that there will be times you’ll have to make a big expense that you’ll need to pay off over time. That’s one of the benefits of having credit cards! But make sure you are paying at least the minimum balance each month so that you do not have any late fees or negative marks on your credit.
However, the good news is there is some room for human error. In most cases, you get a 30-day grace period before a lender will report your late payment to the credit bureaus. So if you are a couple of days late, you may have to pay a small fee but you shouldn’t see an impact on your credit score. Some ways to help prevent late payments are to set up automatic payments or set reminders for yourself!
Use as little of the credit line as possible
The second biggest factor that impacts your credit score is called credit utilization. This is the percentage of your total credit that you’re using. For example, if your total credit line available is $1000, then you should not use more than 30% or $300. It’s best to keep this number below 30%. If you can possibly get this percentage under 10%, that’s even better. While it may sound counterintuitive to the purpose of getting a credit card with a limit of $1,000, following these guidelines will help you obtain higher credit lines in the future.
If you do spend more than that on your credit card, don’t stress. Credit utilization is one of the most dynamic components of your credit score, meaning that depending on your spending habits and when you pay it off, you may see your score fluctuate from month to month. As soon as you pay your balance down, you’ll likely see an immediate improvement in your credit score (as long as you are keeping up with payments and other factors).
Try to keep the credit card open as long as you can
The age of your credit, meaning how long an account or accounts have been open is another factor that impacts your credit score. Lenders want to see a long-standing and established history with credit. With your first card, you need to have at least six months of making payments on time before receiving your first credit score. Six months isn’t much of a credit age, of course, but you need to start somewhere.
When it’s time to apply for another credit card, don’t rush to close that one! Keeping the card open will give you an older credit age, which is important to your score.
Don’t apply for a bunch of credit cards at once
Be mindful of applying for other credit cards or loans shortly after receiving your first card. Applying for a credit card or loan is what’s called a hard inquiry. These lead to a temporary hit on your credit score. Applying for more credit cards at once can not only lower your young credit score, but it can also be a red flag to lenders that you are looking to “see what you can get.”
Alternatively, soft inquiries, such as the employer example above, have no impact on your credit score. Checking your credit score is also an example of a soft inquiry, so feel free to take a look as often as you’d like to see where you stand!
You can also learn more about the difference between hard and soft inquiries here.
Check your credit report for errors
It’s important to review your credit report at least a few times per year to make sure there are no errors. If you do see a negative mark that is incorrect, you should dispute it with the credit bureaus.
You work hard for your credit, and you want to make sure that there aren’t errors that could damage your score. Practice these good habits above and you will be on your way to building credit and a good-to-excellent credit score. And you can monitor your credit score for free at Credit Sesame.
