Your first credit card is pretty much the embodiment of Uncle Ben telling Peter Parker, aka Spiderman, “With great power comes great responsibility.” Getting a credit card is a milestone on your financial journey. It’s a valuable opportunity to start building credit. You may even be able to take advantage of points or cash back. However, you need to proceed very carefully with how you use your new credit card. Here are some tips on using your first credit card responsibly.
Around 55% of American adults with a credit card have reported being in credit card debt. High-interest rates make it challenging to keep that debt from snowballing into something unmanageable. Read through these tips on managing credit responsibly.
Using Your First Credit Card Responsibly
1. Never pay late.
Whatever you do, never fall behind on credit card payments. Between late fees, penalty interest rates that can reach 30% (!), and damaged credit scores, this will get expensive very quickly. Sign up for automated withdrawals from your checking account if your credit institution allows that. Alternatively, set up an alarm on your phone to remind you before the deadline.
2. Always pay the full amount each month.
When you start getting your monthly credit card bills, you’ll see a minimum payment amount that you’re required to pay. In the worst-case scenario, paying the minimum is still better than not paying at all. You really should aim to pay off the full amount owed each month.
Otherwise, you’ll be charged interest on the remaining amount. With interest rates hovering around 17%, those payments can quickly get out of hand. You won’t be able to catch up in a realistic time frame. Additionally, you will pay an incredible amount of money in interest alone, an amount that far exceeds what you originally spent. Which brings us to the next point…
3. Don’t spend more than you can afford.
This should be fairly obvious, but having a credit card can warp your perception of money. More specifically, the money you end up spending just doesn’t feel… real. You’re just swiping a bit of plastic, and that amount you’ve been charged just floats off into the ether—until the bill comes.
Don’t give future you any more problems! Make sure you can afford the amounts you’re charging to your card. That means paying off the entire balance every single month. In fact, the more you treat your credit card like a debit card, the better off you’ll be in the long run. This is probably the most important piece of advice for using your first credit card responsibly.
4. Build up savings before getting your first credit card.
The best way to ensure you don’t fall into the vicious cycle of credit card debt is to ensure you’ve built up a healthy financial foundation before you even start using your card. If you’re applying for your first credit card, there’s a good chance you don’t have much in savings yet. That’s okay, as long as you’re building up a steady savings habit for both short-term and long-term use.
One of the best ways to ensure you don’t fall into credit card debt is to make use of savings if there’s an emergency. After all, that’s what savings are there for! And as mentioned before, the interest that credit card debt accrues is way more aggressive than any interest you’d earn from savings and investing.
In addition to an emergency fund (which should hold about three to six months’ worth of expenses), the next step to building your wealth could be to invest in low-cost ETFs (exchange traded funds). While a good old-fashioned savings account is also an option, having an additional investment account can help you build up savings that could outpace the annual rate of inflation. That’s provided you are willing to take the additional risk that comes with investing. ETFs are usually managed by an algorithm which allows them to have low management fees—they’re not a strain on your wallet. Investing won’t be for everyone, and you should speak to a financial planner before investing.
If you’re diligent about paying off debt and not relying on your credit card for emergencies that should be paid for by savings, then you’re well on your way. Build strong credit and benefit from the flexibility a credit card affords you.
If you have trouble paying off debt, call ACCC at 800-769-3571 for free credit counseling.
