NEW YORK (MainStreet) — Most people realize that going on a shopping spree the day after your first credit card arrives in the mail is generally a recipe for disaster. However, letting the card gather dust in the very back of your wallet can be just as counterproductive.
“You have to use the card in order to establish a payment history,” Beverly Harzog, a credit card expert with Credit.com, says. And, as you might already know, you’ll have to establish a payment history to build your credit score, which will help you qualify for lower interest rates on loans and better credit card rewards programs, among other things.
Of course, while young American may know they need to pay their bill off on time or avoid overdoing it, they might not know the best ways to use their very first card.
“Unless they’ve been taught by their parents, they don’t always know how to use it,” Harzog says.
MainStreet talked to credit experts about what first-timers should do to avoid potential pitfalls and swiftly boost their credit score once that first piece of plastic arrives in the mail.
Charge items, but stay within 5% to 10% of your credit limit at all times.
As reported, your credit score isn’t only affected by your payment history. Most credit scoring models tabulate scores using four other criteria: your debt to credit ratio; the length of your credit history; the number of accounts you’ve opened and, finally, the type of accounts (for instance, a mortgage versus an auto loan) you’ve got on the books.
While you can’t really directly influence the length of your credit history or the number and types of accounts you have with your first credit card, using it will impact your credit utilization ratio, the amount of debt you currently carry versus how much credit you have available to you.
John Ulzheimer, president of consumer education for SmartCredit.com, says those who walk amongst the credit elite typically only utilize 7% of their total credit limit at any given time, though that ratio, he admits, is often difficult to maintain.
To make sure that your score is being helped by current credit utilization ratio, Harzog says to keep your usage to around 10%, while Bruce McClary of ClearPoint Credit Counseling Solutions says you’ll need to keep charges under 50% to make sure the score isn’t hindered.
The one thing you’ll absolutely want to refrain from is maxing the card out, which will send your credit utilization ratio soaring in the wrong direction and could also serve as a portent of doom.
“You need to establish positive habits right away,” McClary says.
Keep a low credit limit.
You can also help yourself build credit by managing the limit itself. This can be more difficult than it sounds as issuers are often quick to offer to raise the limit on an existing credit line once the holder has shown they can handle the original one.
“Communicate with your issuer and tell them where you’d like your limit to be set,” McClary says. “You can also tell them that you don’t want the limit raised unless you ask them to.”
Harzog suggests keeping your credit limit at $1,000 or lower while you are building credit.
Stay on top of your spending.
You also shouldn’t raise your credit limit until you know how much you can afford to put on your credit each month. To figure this out, Harzog suggests using your first credit card as a reason to set a budget.
“Track your spending,” she says, using budgeting sites like Bundle or Mint, which can send you email alert if you’re about to go over budget.
Similarly, McClary also suggests setting up alerts either on your phone or even plastering some Post-its on your refrigerator so that you remember to pay the bill on time. Those who know they are particularly forgetful might also considering setting up an automatic bill pay, though McClary admits this might be difficult if your bill varies greatly from month to month.
Pay off your monthly balances in full.
“You don’t want to carry a dime over,” Ulzheimer says.
He explains that paying off a balance in full won’t automatically boost your credit score as the information on your credit report only reflects the balance on your monthly statement and whether or not you’ve become delinquent on your payments, not how much or how you little you’re electing to pay by each bill’s due date.
However, it will spare you from having to pay any interest, which can be particularly high on first-timers cards, and will help to ensure that you stay up-to-date on payments in the future. It will also keep your credit utilization ratio in check, which, as mentioned, does have direct bearing on your score.
Take advantage of rewards.
Cards with the best rewards card are reserved for those who have already established a spotless credit history, but Harzog says there are still some cards out there that offer light rewards a credit newbie can conceivably be approved for. (The Discover Open Road card, which you may remember from our story on the best credit cards for grads, offers 1% cash back on all purchases and added rewards on purchases made at gas stations and at restaurants.)
Harzog says that applicants who are approved for a card with rewards shouldn’t shy away from accepting the issuers offer just because the interest rates or the annual fee may be a little higher.
“Rewards card are great,” Harzog says, even for students or recent grads, since they enable you to get something back for all the money that you are spending. However, she advises consumers to familiarize themselves with program’s terms and conditions, since many have restrictions on points redemption and earning limits.
“In order to work the program, you have to know what it is,” she says.
You can find a more suggestions on how to build credit in your 20s (and then thereafter) in MainStreet’s article on credit tips for every age.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.