9 tips to help new cardholders build credit, avoid debt
By Tom O'Connell
December 9, 2015
With a slick new piece of plastic at one’s fingertips and a pristine credit slate, it’s easy for a first-time cardholder to get in over his or her head.
“This happens a lot, particularly with young cardholders who maybe do not have full-time or consistent income” due to school, etc., says Lauren Bowling, personal finance blogger at L Bee and the Money Tree. “Credit cards are fun to use, but it isn’t free money, even though it can feel that way.”
It all starts with choosing the right card. William Lund, superintendent of the Maine Bureau of Consumer Credit Protection, says selecting a card is a lot like shopping for a car. All the information about each vehicle is available to you, but you have to do your research. Like with a car, you want a set of wheels you can afford that is a good fit for you.
Heed these 9 do’s and don’ts from the experts on how to choose a card and then use it with care:
- Don’t apply for cards beyond your reach. Do your research on the minimum requirements of a card before applying for it. Check your credit scores at MyFICO.com. This will help you to assess the cards for which you’re apt to be approved. Don’t apply for a handful of cards hoping to be approved for one, because each time you apply, you trigger a hard inquiry on your credit, which will temporarily ding your credit score. If you have a very low or no credit score, you may have to start with a secured card, which requires you to secure a credit line with a deposit. A secured card ensures that you can’t spend more than what is in the account.
- Do select your card with care. There are plenty of cards catering to young people with little to no credit history. In the small print, look for things such as annual and monthly fees, and a grace period that allows you to pay your balance completely to avoid interest charges. You may need to start with a student card, a store card or a secured card for a year or so to jump-start your credit profile. Once your credit scores are in the 700s, you can start looking for a card that offers rewards or other perks.
- Don’t be swayed only by rewards. Frequent flier points, cash back and other rewards are nice, but look at them as a bonus, plus these cards are often reserved for consumers with excellent and well-established credit. Don’t let racking up points lead you to overspending. Rewards cards often come with sweet sign-up bonuses, but they require the cardholder to spend a certain amount in a matter of months. Most rewards cards also have an annual fee, though this is often waived during the first year. A possible advantage to a cash-back rewards card is that it will return some money to your wallet.
Credit cards are fun to use, but it isn’t free money, even though it can feel that way.”
— Lauren Bowling,
personal finance blogger
at L Bee and the Money Tree
- Do stick to a budget. Experts say everything centers on how you budget your resources. Unnecessary impulse purchases can devastate your finances, preventing you from taking care of required expenditures such as rent, car payment and even essentials such as food. Look at major purchases as a reward to yourself once or twice a year. A giant TV provides endless entertainment, but it won’t protect you from an eviction notice.
- Don’t pile up debt. With a new card, you quickly can rack up thousands of dollars in purchases. And with a mound of debt, subsequent payments may just be paying down the interest. That’s when it can get scary — and extremely stressful — for new cardholders. This is an advantage of a secured or prepaid card — you can’t spend more than what’s in the account.
- Don’t pay just the minimum. The bulk of a minimum payment goes toward interest. If you pay the minimum, you’ll be paying much more in interest and for a much longer period. Paying just $10 over the minimum can make a difference. A $1,500 debt with a $37-per-month minimum, for example, would take 159 months to pay off at an interest charge of $1,760, according to BankofAmerica.com. Paying an additional $10 per month means you’d be paying for 44 months with an interest charge of $557.59. That’s huge.
- Don’t rack up late fees. Stay on top of your card’s payment due dates. You often can set up alerts at your card issuer’s website or use a smartphone app to remind you of payment due dates. If you do miss a due date, you might have a chance of getting a late fee reversed with a quick phone call to your card issuer. It never hurts to ask, but know that you’ll likely be allowed a late-fee reversal only once.
- Don’t lose that low introductory rate. This is a big one. Not reading the small print of your credit card agreement could cost you. You can kiss that low introductory interest rate goodbye for any number of infractions, most commonly for missing a payment by the due date. Pay late and you could see your annual percentage rate (APR) skyrocket from zero to double digits.
- Do build a rainy day fund. Always pay yourself first, goes the adage. It’s easy to fall back on a credit card if you lose your job or have an unexpected expense, such as a car repair. Experts recommend keeping a rainy day fund equal to three months to a year of your expenses. “This is important if you’d like to keep credit card debt at bay,” says Bowling. “Having a rainy day fund ensures you’re not putting emergencies on the cards and creating a vicious cycle of debt-payoff-debt-payoff.” And don’t go digging into your rainy day fund for the fun purchases. Keep a separate rewards fund.
Once you do have that shiny piece of plastic, wield it strategically. By not charging more than you can afford and by paying on time, you’re building a credit history that will last a lifetime, helping you to secure loans, land a job and get an apartment or mortgage.