When you’re working to build or rebuild your credit history, how you use credit is everything. You must 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. For those of you who haven't yet begun building your credit, taking the time to learn good habits now will give you a financial advantage that you can benefit from throughout your life.
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. Instead, you want to use a credit card to begin building a good credit history and 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. Let this be the only charge you make on your credit card for at least six months. This will help you stay below your credit limit and pay your balance in full every month—two habits that will have a positive effect on your credit score.
Consider doing this with a bill around $20 so that you can easily pay it off each month.
Make Bigger Purchases When Prepared
Once you've established 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 to ensure that you never use more than 30% of your credit limit. For example, if your credit limit is $100, don't let your balance go above $30.
When you make a credit card purchase, put enough cash 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 the payment ready. In most cases, you won't have to wait until the bill arrives. You can make a credit card payment as soon as a transaction is processed and added to your account balance.
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.
If your credit limit is cut, then your existing balance will take up a larger portion of your limit, which could negatively affect your credit score.
Using a credit card the right way requires self-discipline. You’ll have to tell yourself “no” when you want to use your credit card to make a purchase that you know you won't be able to pay 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. Remind yourself that you have already spent that chunk of money you've set aside—you just haven't gotten the bill yet. If the temptation is too much to handle, send in your payment as soon as the transaction posts to your account.
Start with just one credit card, so you can keep your payments manageable. Several balances with different due dates can cause confusion, which in turn can lead 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 using 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. You may also be able to download a mobile app that allows you to quickly check your balance on your phone. 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 allow you to receive your statement online instead of through the regular mail service.
Learning the best way to monitor your credit activity is all about knowing your habits and what works best for you. Some people need a paper credit card statement in the mail to remind them to make their credit card payments. If you need the physical reminder, don’t sign up for paperless billing. If you check your email inbox more than your physical inbox, you're probably fine sticking with paperless billing.
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 again until you can afford to pay off both what you owe and any new charges.
This is the benefit of paying your balance in full—you don't have to worry about keeping up with payments if your income decreases or other expenses increase.
The Bottom Line
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.