Credit Cards can be one of the best or worst things for your credit report. The outcome ultimately depends on how you manage your cards, and yes, there is a wrong and right way to do things.
The most important thing to be aware of before applying for your first card is the fine-print of the sign-up bonus. Most sign-up bonuses require that you spend $1,000 – $3,000 within 90 days. It doesn’t matter if you spend it in one transaction or one hundred, you just have to accumulate ‘X’ amount of charges in 90 days. If spending ‘X’ amount in 90 days is not something you can accomplish without over-extending yourself, maybe hold off on the application for the time being.
Remember, you can use Plastiq to pay bills with your credit card like Mortgage, rent, car payments, etc. If you can charge things on your credit card that you would have to pay otherwise, that is your best option for hitting a minimum spend requirement.
Another point that should be mentioned is the fact that you don’t have to wait until your due date to make a payment. What I recommend is setting up automatic payments the moment you activate the card. This will make sure, at the very least, you won’t make a late payment. Some credit cards don’t let the auto payments kick-in until the second or third month so be sure to read the details when setting it up and plan accordingly.
Taking the auto-payments one step further, you can pay any charge manually as long as it is posted. A pending or temporary charge cannot be paid until it has been posted, it typically takes 2-3 days.
It is important to know the difference between your payment due date and your statement date. Your statement date should close 30 days after you were approved for the card and then every 30 days after on the same date. Your statement helps break up your spending so you can track charges and fees. The data from your last statement is sent to the credit bureau so they can track the amount of money borrowed within that statement. If possible, try to pay your credit card off in-full before your statement closes.
Why should I pay off my credit card before the statement close date when I already have a payment due-date? Like I mentioned earlier, the credit bureaus use your statement info to help calculate your credit report, a measure called ‘credit utilization’. If you have a credit limit of $5,000 and show $1,000 of charges when your statement closed, you would have a 20% utilization on that credit card for that period. Having a 20% utilization can lower your credit score since it shows that you “need” to borrow $1,000. You can pay your credit card off in full before your statement closes, that will show a “zero” balance on your credit report, thus increasing your score.
Do I have to regularly use my card in order for it to improve my credit report? This is one of the biggest myths out there. Almost every credit card company reports your balance to the credit bureaus even if you didn’t charge anything during that statement. The simple fact of having available credit and not using it causes your score to improve over time. It is totally okay for you to sign up for a credit card, receive the sign-up bonus, and then never use the card again. You might want to use the card once or twice a year to keep it active (I have active cards I haven’t used in three years), but you don’t need to use a credit card regularly if you feel more comfortable with cash or debit. Just know that debit and cash earns you NO POINTS!
Lastly, if you pay off your most recent statement balance by your payment due date you will pay NO interest. You only pay interest if you do not pay off your statement balance in full. Remember earlier when I recommended setting up auto payments to pay your statement balance (or ‘total new balance’) in full, doing so will ensure that you don’t pay any interest on your card. As with anything financial, make sure to call or chat your credit card company to ensure they follow the conventional rules of interest and credit reporting, don’t just take my word.
If you are not going to pay your statements off in full (which is still a free 30 day loan, essentially) DO NOT sign up for travel credit cards. These cards have higher than usual interest rates to help offset the points and bonus. If you plan on only making a minimum credit card payment it would be best to sign up for a zero interest card that doesn’t offer any points, it is not worth the trade-off. If you stay on top of your credit cards and spend responsibly you should see your credit report reflect your efforts very quickly!