Getting a credit card can sometimes seem like an intimidating process. This is especially true if you don’t know how to use a credit card responsibly.
After all, there’s the possibility of mismanaging your cards and ending up with a bad credit score. You can also start a cycle of debt with just a few wrong moves.
Luckily, responsible borrowing is very simple and with a little work, can actually help you in the long run. If you’d like to learn more about how to use a credit card responsibly, keep reading to learn more.
How To Build Credit With a Credit Card
If you are young, chances are you don’t have much of a credit score yet. Getting your first credit card can help you build credit, which helps you down the road when buying things such as cars and houses.
There are a few basic things to remember that can dramatically improve your credit score. These include:
- Keep your credit use below thirty percent (30%)
- Make payments on time and avoid carrying over debt every month
- The age of your accounts improves your credit (longer is better)
- The number of accounts improves your credit, but don’t open too many at the same time
If you have bad credit, a secured credit card can help. These require you to put down a cash deposit and will give you a line of credit. If you follow the “rules” of credit cards above, you can improve your credit score over time.
Likewise, the four tips below are equally important to implement.
1. Keep Your Balance Below 30% of Your Credit Limit
When you get a new credit card, you are given a spending limit. This limit depends on your credit score and history. Many cards for first-timers start at around $500.
You want to keep your spending on your card below thirty percent. While you can spend up to your limit if you have to, make sure to pay it down below that thirty percent threshold before your billing period ends.
After you’ve improved your credit score and shown a good history, your credit card company will often raise your limit. Most credit cards make it very easy to request a credit increase. You can often apply for a credit increase within your account dashboard by answering a few simple questions.
2. Request a Credit Limit Increase
If you’re looking to improve your credit score, then you’ll want to request for your credit limit to be as high as possible. This is because it is good to have a low credit utilization ratio. A credit utilization ratio is the of money you owe the credit card issuer to the total credit you have available.
For example, if your credit card limit is $5000 and you owe $2500 on it, then your credit utilization ratio would be 50%. If you could get your credit increased to $10,000 by your credit card issuer, then your credit utilization ratio would drop to only 25%.
Credit utilization makes up approximately one-third (30%) of your credit score. This means it is one of the single most important factors that will impact your credit report.
As a rule of thumb, the lower your credit utilization ratio the better, but anything below 30% is considered “responsible”. Also, zero (0%) may not necessarily be the best ratio to have because it may indicate infrequent usage of your credit line.
However, if you use this approach, remember not to take credit increases as a signal to start spending more, unless you can afford to pay off more every month. You should only request a credit limit increase if you are confident you can use it responsibly.
3. Charge Re-Occurring Expenses To Your Card
When you get a shiny new card, it can be tempting to use it everywhere. But there’s a smarter way to avoid debt.
The best use for a credit card is monthly recurring payments. This includes streaming subscriptions and things such as phone bills.
This way, you don’t have to worry about paying for multiple small things each month and can just pay a single credit card bill.
One of the reasons this is so effective is that these items tend to be small and predictable payments. The other reason is that this approach will keep the amount that you owe on your credit card similar each month, so that you don’t get surprised at the end of the month or experience major swings.
Be aware of your card security. Make sure that only you have the security codes on credit cards and don’t store your credit card numbers online.
4. Make Your Payments On Time and In Full
Like the “rules” above state, you want to make sure you make payments on time. But many people forget about the interest rates on credit cards, which are often appalling. It is not at all uncommon for credit card interest rates to be above 15%. And, some credit card rates will float as high as 20-25% or higher.
If you only make minimum payments every month, you will end up paying substantially more in interest rates. Make sure that you are paying down your balance below thirty percent every month.
Ideally, you should pay off your credit card in full every single month. If you do this, then you can collect credit card perks (in the form or airlines miles or cash back, for example), without paying out a single cent in interest.
This is how you “use” the credit card companies, instead of letting them “use” you.
How to Use a Credit Card Responsibly
While learning to use a credit card can seem scary, they are an effective tool for building credit. By staying on top of your payments and not opening too many cards at once, you can achieve a high credit score in just a few years.
For more financial tips and tricks, explore out the Finance section of this blog.