How to use your first credit card

Getting a first credit card is a huge step on your way to building the credit you’ll need later in life.

By using your new credit card responsibly and wisely, you can begin building valuable credit history and pick up new habits that will benefit you for decades to come. Though, you’ll want to make sure you have a plan in place that helps you get the most out of your first credit card, while avoiding the major pitfalls of plastic.

As we all know, far too many people get into financial trouble with their first credit card — either by racking up debt or making late payments that wind up hurting their scores.

If you’re excited about your new card and want to make sure you’re using it to your advantage, here are some steps you should take right away.

Only use your card for purchases you can afford to pay off immediately

Due to the high interest rates credit cards charge, they are rarely the best option if you need to carry a balance for longer than a month. After all, the average interest rate for all major credit cards is currently above 18 percent, and many starter cards charge even higher rates.

With that in mind, you should only charge purchases you can afford to pay off immediately, and refrain from using plastic for “splurge” purchases altogether. Also, try to use your credit card alongside a monthly budget or spending plan.

Get into the habit of paying your balance in full

Only charging what you can afford to pay off also paves the way to paying your credit card balance in full each month. This step will not only help you avoid paying credit card interest, but it will help you avoid a growing debt balance.

Paying your credit card bill in full each month can also help you keep your credit utilization ratio — or the amount you owe on your cards in relation to your credit limits — in check. How much you owe on your credit card accounts for 30 percent of your FICO score, making it the second most important factor. It’s second only to payment history, which accounts for 35 percent of your score.

Most experts suggest keeping your credit utilization ratio below 10 percent (or 30 percent, at most) for the best results.

 Set up auto-pay

Since your payment history is the most important factor that determines your FICO score, you need to make sure you never pay your credit card bill after it’s due. If you’re worried you’ll forget, consider setting up automatic payments to be drawn from your bank account on your credit card bill’s due date.

You can even set up auto-pay for just the minimum payment amount to be paid automatically. This won’t help you avoid carrying a balance from one billing cycle to the next, but it will help you avoid late fees and being hit with a penalty APR.

Earn rewards on spending

If your new credit card offers cash back or rewards points on your spending, you should be making the most of this benefit without putting yourself at risk. For example, make sure to charge purchases that fall within any bonus categories your card offers, but don’t overspend just to earn rewards.

Also, try to meet any minimum spending requirement you need to reach in order to score a sign-up bonus. Just don’t buy things you don’t need in order to hit the threshold.

Rewards aren’t worth it if you wind up carrying a balance. With most cash back credit cards offering 2 percent back at most and current interest rates on cards hovering around 18 percent, it’s easy to see how chasing rewards while you’re in debt is a losing proposition.

Get acquainted with your credit card perks

Also make sure you read about any perks or features your credit card offers, which could include extended warranties, purchase protection against damage or theft, and travel insurance benefits.

By knowing which perks your credit card offers, you’ll be in the best position to take advantage. Just remember that most perks require you to pay for something with your card first. For example, you’ll only get travel insurance benefits for trips you charge to your credit card, and purchase protections only apply to items you paid for with your credit card.

Monitor your credit score

Finally, make sure to monitor your credit usage and your progress throughout your journey to building credit. Doing so can help you spot problems as soon as they occur, and monitoring your credit can also help you spot signs of identity theft or fraud.

Fortunately, many credit card companies give you access to a free credit score within your monthly credit card statement. Programs like Capital One’s CreditWise and Chase’s Credit Journey can also help you track your credit score and overall credit health for free.

The bottom line

Getting approved for a first credit card can be an exciting time, but you’ll want to make sure you have a plan to maximize the experience. By using your card intentionally, avoiding long-term debt and making the most of your credit card’s rewards and perks, you can get more bang for your buck and begin building positive credit habits that can last a lifetime.