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Plan Well, Retire Well

Saving and investing your money
First Credit Card - part 3

Care and Feeding of your first card. Steps toward your first Credit Card part 3

In previous posts, I have talked about deciding if you can handle a credit card by looking at your spending habits (read that post here) and the next step of determining which card is for you (read that post here).

By now you have applied for and received your first card. Let's talk about how you use and maintain your card.

  1. 1. Read all the paperwork that came with your card. Make sure of the credit limits, interest rate, the date your payments are due and any other fine print on materials sent to you. Some of these items may have changed from the time you applied for the card. If anything is different that you do not agree with, do not activate the card, shred it and call and cancel the account. Make a copy of the front and back of the card and pit it in a safe place. The information will be valuable if your card lost or stolen.

  1. Activate your new card, sign it on the back (include check photo ID if desired but signing a card is a must!) Say no to all the additional services they will offer (at a small monthly charge to your card) like, insurance, ID protection, etc. Do sign up for e-mail and text notifications that alert you to payment dates and balance limits as well as automatic minimum payments to avoid late fees.
  1. Use your card responsibly. Use it only within your budget. Occasionally make a charge and pay it off right away to prove you can handle the credit. Anything you charge should be paid off in full at the end of every month. In the rare case you cannot do that, pay as much of the balance as you can. Do not fall into the minimum payment trap.
  1. 4. Watch how much of your credit limit you use. This is called credit utilization and can negatively affect your credit scores even if you make on time payments and pay off monthly balances. Here's how it works. Think of your credit limits as a swimming pool full of water. As you spend on your cards, you are lowering the level of the water. If you use 10-20 % of your limits, the pool still has enough water to swim comfortably. If you use 50%, you can still play in the pool but not dive or have much fun. Using 80-90% of your credit limit, and people start to worry about the safety of the pool. It is the same with the amount of credit you use on a monthly basis. Utilization is based on how much of your credit limits you have utilized by the last day of your statement cycle. So even if you pay off the balance by the due date, your utilization might still be too high. This will affect the ability to get more credit when you need it –like for a car or a house. Banks prefer you keep your utilization under 30% of your limits and if you are planning on accessing more credit (like for a house, car or other large purchase)keep it between 10-20 %.
  1. 5. Report any international travel to the credit card company. Computer systems are now set up to pick up on transactions that are out of your "normal" habits. If you suddenly use your credit card in Mexico or even out of your home state, the transactions may be flagged and your card shut down. This is to stop fraud. Calling (or even sending a message online) and letting them know your travel plans can avoid those embarrassing situations. Additionally, they can advise you on the acceptance of your card in the area you are visiting. The last time I went to Mexico, I was told my card was not accepted in very many stores, but I could get cash at any ATM. It was helpful advice.
  1. Remember that credit reporting bureaus, banks and people you do business with (insurance companies, landlords, and utility companies) are perpetually watching. How you conduct yourself with that card will continuously be reported and scored. So build your credit rating by paying on time and keeping that balance low. keep up with what is being reported by checking your reports frequently. For more on that read here.

Credit is a necessary tool in today's economy. Unless you pay cash for everything, you will not be able to buy a house or car without credit. It is difficult, if not impossible to rent a car without a credit card. While you can reserve a hotel room with a debit card, you are often subjected to a substantial hold on the money in your checking account that you may want to use for other purposes. Having good credit is better than no credit and can make life more affordable. Many people who extend you service credit (services that you pay for after using like utilities and phone bills) may charge you more or ask for larger security deposits depending on your credit. Further, when you need the big loans for a car or a house, your interest rate could be much higher if you do not have good credit. This could cost you thousands, even tens of thousands of dollars over the life of the loans.

Start now by making your credit plan, using it responsibly, and creating healthy lifelong credit habits that will serve you well and save you lots of money.

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