How to Use Credit the Right Way
When you’re working to build or rebuild your credit history, how you use credit is everything. It’s important that you use credit the right way to build and maintain a good credit score. Unfortunately, credit cards don’t come with a manual telling you how to use them responsibly. You may have already learned the hard way about the devastating effects of credit misuse, but it’s never too late to start over.
Get Started With Credit
If you're just getting started with your first credit card, ease into it slowly. Don’t go out and immediately max out your credit card. In fact, you should never max out your card. Instead, make small charges on your credit card and pay the balance in full each month. The goal of a credit card isn’t to buy things you don’t have the cash for, but to begin building a good credit history and instill good credit habits.
One way to get used to your credit card is to use it for a small monthly subscription or another recurring bill, something around $20 or less, and pay it off each month. Let this be the only charge you make on your credit card for at least six months. This will get you in the habit of staying below your credit limit and paying your balance in full every month - two habits that will have a positive effect on your credit score.
Make Bigger Purchases When Prepared
Once you've created a habit of paying your bill in full, you're better prepared to use your credit card for slightly larger purchases. Continue to keep your purchases low, 30% of your credit limit or less. That means your balance should never go above $30 on a credit card with a limit of $100.
When you make a credit card purchase, put the payment aside so you won’t spend it before your bill comes. Then, when it’s time to pay your credit card bill, you already have payment ready. You can also make a credit card payment soon after the purchase, even if the bill hasn't arrived yet.
After several months of using your credit card the right way, your creditor might increase your credit limit, allowing you to charge more on your card. Continue to stay within 30% of your limit even as your limit increases. If you start using your credit card irresponsibly, your credit card issuer can cut your credit limit just as quickly.
Using a credit card the right way self-discipline. You’ll have to tell yourself “no” when you want to use your credit card to make a purchase but can’t pay your bill in full at the end of the month.
When you put money aside to pay your credit card bill, make sure you don’t spend it on something else before your credit card statement arrives. Send in your payment sooner if you think you’ll be tempted to spend your payment.
Start with just one credit card, so you can keep your payments manageable. Several balances and due dates can cause confusing and lead you to debt and a damaged credit score.
It’s easy to accumulate too many credit cards, especially if card issuers keep sending credit card offers. You can stop credit card offers so you won’t be tempted to open new credit cards. If you choose to opt-out temporarily while you get used to credit, you can opt-in later to survey better credit card deals.
Monitor Your Activity
Most credit cards allow you to view your account activity online. If your credit card gives you this ability, sign up so you can monitor your credit card balance and pay your bill online. You can even sign up for paperless billing statements, which allows you to receive your statement online instead of regular mail. Some people need the physical credit card statement to remind them to make their credit card payment. Don’t sign up for paperless billing if you’re one of those people.
A Plan for When You Can’t Pay in Full
There may be months that unexpected expenses keep you from paying your balance in full. During those months, make at least the minimum payment and don’t increase your credit card balance by making more credit card charges.
If you know you don’t have the money to pay your credit card balance, put the card away. Don’t use it until you can afford to pay new charges again. This is the benefit of paying your balance in full - you don't have to worry about maintaining a balance if your income decreases or other expenses increase.
Building a good credit score takes time so don't try to rush it. Use credit responsibly and a great credit score will follow. If you start out with great credit habits, you won't have the difficult task of repairing your credit score later on.