Credit cards can be a little (or very) confusing, especially if you’ve never had one before.
They’re not as straightforward as debit cards, and they come with the risk of racking up high-interest debt. There’s definitely a learning curve, and one you’d be wise to take your time with.
I recently wrote a story about credit cards I recommended to my friends. One of those friends, an army officer named Cat, was applying for her first credit card and had some questions for me. Some of my answers surprised her, and others most likely saved her money. Whether you’re also thinking about getting your first credit card or still building the foundation for your approach to credit cards, here’s the advice I gave my friend.
Before we dive into the specific questions, let’s go over a few basics of responsible card usage. Without these, you might quickly find yourself in expensive debt.
- Don’t charge more than you can pay off in full and on time each month. Pretend your credit card is a debit card if that helps.
- Pay more than the minimum. Otherwise, you’re running the risk of mounting interest charges, and I assure you: it is to be avoided. That’s how people end up in debt.
- Always pay on time. Late payments can cause your credit scores to drop, and they stay on your credit reports for seven years.
- Understand your credit card terms. A credit card is a financial tool. You can’t use a new tool without reading the manual first.
1. What credit card should I get?
Getting a first credit card is the first stop on many people’s credit journey. This was true for Cat, as well. Without a credit history, card options tend to be more limited. That’s not necessarily a bad thing since it’s easy to get overwhelmed when it comes to cards. Plus, a first credit card should be minimalistic, allowing you to get your feet wet without complicated rewards systems or intricate benefits.
I recommended two options for Cat: the Discover it® Secured Credit Card and the Capital One Platinum Credit Card.
Secured cards typically have relaxed credit requirements as you “secure” the credit line with an upfront refundable deposit. The Discover it Secured is Bankrate’s pick for the best secured card with a welcome offer. Discover automatically matches all the cash back cardholders earn at the end of their first year. The card offers 2 percent cash back at gas stations and restaurants (on up to $1,000 in combined purchases each quarter) and 1 percent cash back on all other purchases.
My other suggestion was even simpler. The Capital One Platinum is a rather bare-bones card. It doesn’t offer any rewards or attractive perks, but it also doesn’t require a deposit. And most importantly, you don’t need good credit to qualify. All that makes the card a solid option for credit-building — which is why Cat ended up applying for it.
2. Does spending a lot on your credit card help your credit score?
Once Cat was approved for the Capital One Platinum, she had some questions about the best way to use it, and how to strengthen her credit report in the process. She was under the impression that making big recurring charges led to higher credit scores. She even wondered if she could put rent on her card.
In reality, the amount and number of transactions on a credit card isn’t a credit factor. Cat was surprised to learn that.
“Should I just put recurring bills on it?” she asked. “Like my streaming services and stuff? Will that be enough times a month to build credit?”
I encouraged her to do just that. That’s a fantastic practice for people who want to keep a credit card open to benefit their credit without actively using it for every single purchase. But there’s a bit more to it, at least in terms of how that factors into healthy usage and a growing credit score.
“So I can legit do my $14 a month payment and it’ll be the same as if I used more?” Cat said. “For credit?”
And this is when I decided to explain the concept of a credit utilization ratio, or the percentage of available credit a person uses. Using a large portion of a card’s credit limit won’t help your credit score. In fact, it might just do the opposite.
Experts strongly recommend keeping your credit utilization under 30 percent, or as close to 0 percent as you’re able. Otherwise, you risk losing some credit score points since credit utilization is the second most influential credit factor after payment history. The size of a transaction itself is not as important as how it impacts your overall credit utilization. For example, spending $200 on a card with a $20,000 limit only adds 1 percent to your credit utilization ratio. However, if your credit limit is $200, your credit score may suffer as you have maxed out your card.
Putting rent on a credit card may not be wise, as landlords often charge a fee of 2 to 3 percent for card payments. Third-party services that allow rent payments via credit card also charge similar fees. For instance, paying the median rent of $1,469 with an extra 2.9 percent fee each month would cost you almost $43 monthly and $516 annually.
If you are determined to pay rent with a credit card, consider the Bilt Mastercard, which offers rewards for rent payments without transaction fees. However, this card requires good or excellent credit. Alternatively, services like Experian Boost can help you add rent payments to your credit report to improve your credit score.
Setting up automatic payments for your credit card bill is a convenient way to ensure timely payments and avoid late fees. However, it may not be suitable for everyone, as some prefer to manually pay off their balance to monitor spending more closely and detect any fraudulent charges.
If you pay off the entire balance from your monthly statement, you will not be charged interest regardless of the interest rate on your card. Consistently paying your bill in full is the best way to avoid accruing interest charges. If I’m being completely honest, I couldn’t tell you the exact interest rates on my credit cards, but I know they hover around 25 percent, and I prefer to steer clear of them.
Under the Credit CARD Act of 2009, lenders must send your bill at least 21 days before the due date, allowing for an interest-free grace period. However, cash advances attract immediate cash advance APR, which is typically higher than the regular purchase APR. It’s wise to avoid cash advances to prevent incurring unnecessary charges.
It’s worth noting that not all credit card issuers offer a grace period, especially those targeting individuals with poor credit. Always review the terms and conditions to understand what you’re signing up for.
“Credit cards can be quite confusing,” Cat remarked after our discussion. While some credit practices may seem counterintuitive, using a credit card responsibly is an effective way to build credit. If you have any queries, feel free to reach out to me at anastaples@bankrate.com or connect with me on TikTok and Instagram.