When it comes to figuring out how to build credit, you might already know that a credit card can be a powerful tool in strengthening your credit profile.
If you’re relatively new to using credit cards to build credit or simply want to brush up on better cardholder habits, knowing how to use a credit card wisely is the first step toward your credit goals. Here’s what you should know:
1. Don’t swipe for rewards only
Rewards credit cards can help you save money in the long run. Some cards offer tantalizing sign-up bonuses valued at hundreds of dollars and the prospect of getting cash back on basics, like gas. The appeal of earning rewards can compel you to recklessly chase points.
Smart cardholders know the importance of balancing rewards earnings with what they really need to buy. Instead of changing your purchasing habits to earn rewards, find a credit card that’s best suited to your current spending habits. If you spend most of your monthly budget on groceries, find a card that offers a higher cash back percentage in that category. This way, you have a greater chance of earning higher rewards without spending more.
2. Pay monthly statements in full
The biggest mistake highly effective cardholders avoid is only paying the minimum amount due on their monthly statement. By not paying your statement in full every month, you’re accruing interest on your purchases and possibly negating any value from rewards programs.
One exception to this rule is if you have an introductory 0% APR on a new card for a specific time. In this case, you can choose to make smaller payments to repay a large purchase over time, without getting hit with interest charges. Make sure you’re on top of when the introductory rate expires to ensure you’ve repaid all of your balance before your rate increases.
3. Stay mindful of new accounts
New accounts factor into 10% of your FICO credit score which is the scoring model that many lenders use in their credit decisions. Although a new card account can help you strengthen your credit score, opening too many accounts in a short period raises red flags for creditors. This is particularly a challenge if you have a lean credit history. A good thing to note is that shopping around to compare credit card rates usually just requires a “soft credit check” which doesn’t affect your score.
When you actually accept a credit card offer, the creditor performs a “hard credit check” in this later step. Although hard credit checks only lower your score temporarily, it’s good to note how close you are to this risk.
4. Track purchase activity
Today’s digital landscape lets you put your finances on auto-pilot. Conveniences like enrolling in auto-pay can help you avoid dropping the ball and incurring a late payment fee; however, it also makes it easier for cardholders to stay on top of their card’s activity.
Responsible cardholders take a few minutes before their payment is due to read through statement charges and other card details that might’ve changed (e.g. interest rates). Monitoring your credit card’s purchase activity helps you double-check that, charges are accurate, and can alert you to potential fraud if there’s an unauthorized charge on your statement.
An easy way to stay informed of all account purchases is by signing up for email or text notifications for any purchases greater than zero dollars. Some fraudulent charges are just a few dollars with the hopes that you won’t notice it. By taking these steps, you’ll know exactly what you’re paying for when your next statement is due.
5. Reporting lost or stolen cards ASAP
Savvy cardholders who keep tabs on their credit card activity know how important it is to identify and report unauthorized charges as soon as possible. Most cards from major card networks, such as Visa and Mastercard, offer zero liability consumer protection if they determine that a charge is, in fact, fraudulent.
However, you may be liable for some of the unauthorized charges if you don’t report it promptly. You must reach out to your creditor about a suspicious charge within 60 days of the statement date or you may be held liable.
6. Plan ahead for the unexpected
Although a credit card can help with large, planned purchases, it’s not ideal for unexpected emergency situations. Using a credit card to pay for unplanned spending because you don’t have an emergency savings account can cause a ripple effect on your budget.
Try working toward at least three to six months of expenses for your emergency fund in case of a rainy day. The last thing you need to worry about coming out of a financial road bump is interest charges that haunt you until you repay your card’s balance.
By sticking to these good habits, you can position yourself to benefit from the perks that credit cards offer.
