When you get your first credit card, it feels a little bit like free money. You get to go shopping (even if it’s just for groceries!) without seeing the money fly out your checking account. While this feels fun in the moment, unfortunately you do still have to pay for this stuff later. Especially with your first credit card, you’ll have a smaller credit limit, so it probably won’t take too many grocery trips or gas tank fill-ups to bring you close to your credit limit. Following these tips for your first credit card will help you stay financially responsible without being too nervous to actually use your new card.
If you read the first post in our series, you already know that building your credit score is one of the biggest reasons to get a card, and that your utilization is a key component of that score. With a small credit limit, keeping your utilization (the percentage of your credit line you’re using at any given time) low isn’t easy. Looking for some quick guidelines for approaching spending on your card to keep your credit score trending up? We’ve got you covered!
Managing your Credit Utilization
There’s a big difference between how much you can spend on your card, and how much you should spend on your card. The maximum amount that you can spend on your card is your credit limit, but your goal should be to keep your balance at less than 30% of your total credit limit. So, if your credit limit is $200, you want to make sure to keep your balance below $60.
This may seem like an impossible task – you can hardly buy a tank of gas for $60 in some places! The key to keeping your utilization low with a smaller credit limit is making frequent payments (more on that in the next post!), or just keeping your spending below that 30% utilization limit or lower. We’d recommend setting up a few, smaller bills on your new card, so that you’re still using it regularly but not going too crazy with the spending. Until you get an increased credit limit from your bank or credit card company, you may still need to make some of your day-to-day purchases on your debit card.
Spend Strategically to Earn Rewards
Next step: find out if your new card offers any rewards. With many cards, you may only earn rewards on specific categories of purchases, so make sure to take a closer look at that. For example, if you only earn rewards points or cash back on purchases at the grocery store, make sure to do all your credit card spending at the grocery store! That way, you’ll have a nice treat to enjoy at the end of the month – the perfect reward for being responsible with your new card!
One final piece of advice for spending with plastic is to come up with a system to keep track of everything. A new credit card comes with tons of numbers and dates, and if you don’t stay on top of them, you may find that your credit score isn’t quite what you’d hoped. We’ll include a few quick first credit card tips for acing spending.
First credit card tips: build a spending plan
- Create a target personal “credit limit”: By now, you know that you don’t want to hit your actual credit limit. Calculate the balance you want to stay at or below – definitely less than 30% of your credit limit, ideally between 10-20% – and write that number down. Treat it as your own personal credit limit, and don’t let your spending bring your balance above that number.
- Make a plan to stay below that limit: Either plan a payment schedule to keep your balance below your target, or choose a few recurring payments that will keep your card’s balance low but non-zero. Write this plan down, and stick to it.
- Make rewards-friendly purchases: Find out what kind of purchases your card rewards, and use your card primarily to buy those things. That way, you’ll earn something back from your spending!
Now that you’re an expert on how to spend smart on your card, the next thing you’ll need to learn? Best practices for paying your card. In our next post in this series, we’ll give you some more first credit card tips on when to pay your bills and how much to pay, so stay tuned!