If you are one of those people or are considering applying for your first card when you turn 21, there are pitfalls you can avoid on your way to building or maintaining a great credit score.
Don’t Take the First Card Offer
Like so many things in life, you should shop around and compare before opening a credit card account. Do an internet search and check out your local bank or credit union to see what options are available that best fit your needs. Avoid cards with annual fees out of the gate, and don’t be swayed by flashy offers of cash back unless you read the fine print and figure out how much you have to spend to qualify. If you opt for a rewards card, look for one with no blackout dates.
Make Payments On Time
Being punctual has its rewards, especially when it comes to paying credit card bills. Thirty-five percent of your credit score is based on payment history. And because even one late payment can ding your score, it’s best to never (ever) be tardy. An easy way to stay on top of making timely payments is by setting up an automatic draft either with your credit card company or your financial institution.
Don’t Max Out Your Credit Limit
If you can help it, don’t even spend half of the credit limit you have on any particular card or credit line. The less you spend, the better. That means if you have a credit limit of $2,000 and use $1500, you’re using 75%, which is too much in the eyes of credit reporting bureaus and lenders. Try to use only 10% to 30% of your available credit to establish the best score. Use a debit card or cash for the rest of your spending.
Pay More Than the Minimum
When you only pay the minimum amount required by your credit card issuer, you wind up paying tons more than the original amount charged. That means a $100 dinner tab could end up costing more than twice that amount if you stretch out the payments over months or years. If paying off the balance in full every month isn’t possible, then pay as much as you can above the minimum.
Don’t Cancel Cards
When you finally pay down a card to a zero balance, you should celebrate the milestone. What you shouldn’t do, though, is close the account. Here’s why: it won’t help your credit score. Plus, if it’s your only credit card, you’ll be forced to use cash, debit, or checks for all of your other purchases. Depending on how you cancel your card, your credit score may take a hit, which will make it harder to obtain credit in the future for loans or other big-ticket items. Instead of canceling a card, keep the account active by using it to make one or two small purchases a month. If keeping the card in your wallet is too much temptation, cut the card up, but leave the account open to make sure your credit score isn’t hurt by a cancellation.
With reporting by Casandra Andrews