Fears about blowing their budget and racking up high interest debt have lead a number of millennials to say “no” to credit cards but that doesn’t mean that every 20-something is shy about paying with plastic. The trick is to make sure that you’re using your card wisely so you don’t end up hurting your credit down the line.
Getting your hands on a credit card for the first time can make you feel like a financial grown-up and managing it requires an adult approach. If you’re not familiar with the basics of how credit cards work, you’re potentially setting yourself up for trouble. Millennials can save themselves a lot of headaches and maybe even some money by following the best practices for using credit cards.
1. Get the lowdown on your card’s terms
Most people don’t bother reading over the terms and conditions carefully the first time they sign up for a credit card but you can’t afford to overlook the fine print. You should familiarize yourself with the fees your card issuer charges, what the penalties are for if you don’t pay on time, how balance transfers work, how the interest and finance charges are calculated and whether different interest rates apply to different transactions, such as purchases or cash advances.
If you signed up for a card with a low promotional interest rate, you’ll also want to pay close attention to when the promo period ends. If you transferred a balance to try and save on interest, you could be in for a shock if your rate suddenly increases and you’re not expecting it. The better you understand your card’s terms, the less likely you are to make a mistake that could send your rate skyrocketing or inflate your balance with excessive fees.
2. Stay on top of due dates
Your credit history says a lot about how financially savvy you are to lenders and your credit score is likely to come under scrutiny if you’re trying to get a loan to buy a car or a home. Even though millennials seem to be putting off major buying decisions, it’s still to your advantage to maintain a high score. FICO scores are based on five separate factors and the most important of them is your payment history.
Any time you pay your credit card late or you miss a month’s payment altogether, your creditor reports it to the credit bureaus. Negative remarks can drop your score by several points and if you fall behind more than once, it can be disastrous. Derogatory information can stay on your credit for up to seven years so by the time you’re finally ready to buy your first home, the damage has already been done.
Tracking your due dates on a calendar or setting up mobile alert reminders can help you to get your payments in on time. Take advantage of your Mint account, which can send you email alerts when bills are due. If you don’t have a Mint account set up, what are you waiting for? It’s free!
3. Manage your credit to debt ratio
One of the very worst things 20-somethings can do when they get their first credit card is run it up close to the limit. In addition to your credit report and score, banks also take into consideration your credit utilization ratio when making approval decisions. Simply put, they look at how much debt you owe compared to your total credit limit. If you’ve maxed out your card, it could signal that you’re not able to handle credit responsibly.
You’re better off charging only what you can afford to pay off in full each month so your credit to debt ratio isn’t off the charts. If you’ve already made the mistake of using up a big chunk of your credit line, you could call up your card issuer to try and get your limit increased and work to pay down what you owe.
Keeping your utilization ratio to 30 percent or less is the best way to maintain your credit score and avoid ending up with more debt than you can handle.
4. Make the most of your rewards
Rewards credit cards are appealing because they give you a little extra bang for your buck. Depending on the kind of card you choose, you could earn cash back or points that can be redeemed for flights, hotels, gift cards or merchandise. For millennials who are just starting out in their careers and aren’t earning tons of money, getting a cash back bonus or earning a few freebies here and there just for using a credit card is a definite plus.
Getting the most mileage out of your rewards card means understanding how the rewards structure works. Specifically, you need to know what purchases are eligible to earn rewards, how much you can earn and how points or cash back can be redeemed. If you’ve got a travel rewards card, for example, you’d want to look at whether there are any blackout dates or other restrictions before you try to cash in on those frequent flyer miles.
5. Avoid common pitfalls
Once you’ve gotten that first card, it’s tempting to go out and apply for another one, but it’s a trap you don’t want to fall into. Opening multiple credit card accounts can hurt you in a couple of different ways, starting with how it affects your credit score. Every time a lender pulls your credit, it shows up on your report. Inquiries account for 10 percent of your FICO number and applying for a bunch of cards over a short period of time can eat away at your score.
The other danger is that you end up running up balances on multiple cards. As the amount you owe increases, it affects your credit utilization ratio. Not only that, but your minimum payments may shoot up. That can wreak major havoc on your budget if you’re already struggling to keep up with your student loan payments on top of your regular expenses.
Limiting yourself to just one card and keeping the balance low are the smartest ways to safeguard both your credit and your finances in your 20s. Once you’ve established a solid track record with one card, you can consider opening a second.