Yahoo Finance Got Your First Credit Card? 5 Good Habits to Start Now
If you have recently applied for your first credit card, this statistic might interest you: The average household with revolving credit card debt is carrying a balance of $6,885 and is paying $1,292 a year in interest, according to a recent NerdWallet.com study.
Think about that. Every year, families are spending almost $1,300 just in interest payments on their credit cards, which means many consumers aren't even making much of a dent in their initial payments -- and will have more interest payments to make in future years.
[See: What to Do If You've Fallen (Way) Behind on Your Credit Card Payments.]
Credit cards can be an invaluable tool for any consumer. But like any tool, from a hacksaw to a hammer, if the user isn't careful, he or she can use it incorrectly and do some real damage to themselves.
So if you're new to using credit cards, you'd do well to start forming these good habits now -- and avoid becoming a statistic in a credit card study later.
Pay off the entire amount you owe on your credit cards every month. That sounds logical, but part of the appeal of credit cards is that you don't have to pay them off every month, which is arguably how many consumers find themselves in debt they can't easily get out of. They keep paying the minimum payment to keep out of trouble -- while continuing to spend on their credit card and adding to their balance, a balance that eventually has to be paid off.
Andrea Woroch, a personal finance consultant and speaker in Bakersfield, California, suggests treating your credit card exactly like you would a debit card.
"Only charging what you can afford will keep you out of financial trouble. Debit cards cut you off when you don't have enough funds to cover transactions, whereas credit cards only do that when you've reached your credit limit," Woroch says.
Of course, you might think, well, what's the point? Why use a credit card if you aren't going to take advantage of the fact that you don't have to pay it off every month? But as Woroch points out -- as would any personal finance expert -- you pay off your credit cards every month to improve your credit score and credit history. By doing that, you're increasing the odds that you'll someday be able to get the best interest rates on loans for things like a car or house.
Most personal finance experts will also tell you there is one exception where you don't have to pay off your credit card debt and can feel okay about it: If you have an emergency expense, like car repairs. If you have an $800 brake job, but your savings account is anemic or nonexistent, and you can only afford to pay $120 toward the repair that month, get the car fixed and don't worry about it. But pay it all off as soon as you can.
Everyone knows that saving money is important. But as Shane Enete, an assistant professor of finance at Biola University in Los Angeles, puts it: "Holding credit card debt is the opposite of saving. You sacrifice the future for the sake of a better present, versus sacrificing the present for the sake of a better future."
[See: 12 Habits to Help You Take Control of Your Credit.]
Keep your credit utilization ratio low. The reason you want to pay off those hypothetical car brakes isn't only a matter of not wanting to carry revolving debt, which can end up making that $800 payment cost more like $900 or more. You also should be trying to keep your credit utilization ratio low. If it's high, especially consistently, that can damage your credit score.
So what is credit utilization ratio? That's the term used to measure how much a consumer owes on her credit card or credit cards versus what her credit limit is. If you have a credit card limit of $1,000, and you have spent $700, you have a 70 percent credit utilization ratio.
As a general rule, though, lenders like to see a 30 percent (or less) credit utilization ratio. Even if you pay off that $700 every month, bringing your balance down to zero, having a 70 percent credit utilization ratio at any point in the billing cycle can bring your score down -- and doing it repeatedly may make lenders a little squeamish.
And ideally, if you have a credit limit of $1,000, you'll be spending no more than $150 on the credit card per month.
"Try to keep your utilization ratio below 15 percent to maximize your credit score," advises Randall Yates, the Plano, Texas-based CEO of The Lenders Network, a website that helps homebuyers find lenders and real estate agents.
If you have rewards, pay attention to them. Some credit cards offer points you can redeem for merchandise or travel, but if you don't pay attention to the rewards you're earning, you may not utilize them very well. For instance, trading in rewards points for cash usually gives you less monetary value than if you use them to go toward miles on a flight.
[See: 9 Financial Tools You Should Be Using.]
Check your statement once a month. It's easy not to open that email or envelope and look at your credit card statement. You're busy, and you know what you bought, so why bother?
Because there may be some weird charge on there that you didn't pay for, says Andrew Fiebert, based out of Hoboken, New Jersey, and the co-founder of "Listen Money Matters," a personal finance podcast and blog.
"A few years ago, I was going through my credit card statement and noticed bizarre charges for an online company I have never heard of. The charges were small, had I not gone through my statement I probably would have continued paying for the service."
Remember your credit card payment's due date. If you can at all help it, don't pay your bill late. Just don't.
"Missing payments on credit card bills will tank your credit score pretty quickly," Woroch says. "If you're forgetful or prefer the convenience of set-it-and-forget-it bill pay, automate your credit card payments so you always pay on time. Set payment dates for when you know your checking account will have funds, like a few days after you typically receive your paycheck."
And missing a payment will likely make your interest rate climb, so if you do have revolving debt, carrying it is going to be even more expensive. In other words, a late credit card payment is a lot like playing financial dominoes, only minus the fun.
More From US News & World Report
