Lifehacker asked what a first-time credit card owner needs to know. As someone who first got a credit card at the age of 20 and is still reaping the benefits of using one correctly from the start, I have some advice to give on that.
Rule number 1 is where I differ from many financial gurus you’ll hear on TV, but they’re generally talking to people who are too far gone to use credit cards responsibly. If you’re about to get your first card, rule number 1 is, surprisingly, to use it.
Rule number 2 is even more important, though. Never charge more than you can pay off by the time the bill comes.
The only exception is a dire emergency, but a sale at a furniture store isn’t an emergency. An emergency is a $600 car repair, or a trip to the doctor. Earlier this year, I actually put off repairing a garage door opener until I was in better financial shape. That was a $200 repair. I lived without a garage door opener for several months in order to delay a $200 expense.
That’s the kind of mindset you need. Under normal circumstances, of course, I’d just go do it. But when you’re in between jobs like I was at the time, a $200 garage door opener isn’t an emergency. That’s two weeks’ worth of groceries.
So, with the mindset out of the way, let’s talk about the rules in more detail.
Use the card
I charged my textbooks every semester after I got my first card. Then I paid them off. Running the card up to the credit limit and then paying it off at the end of the month several months in a row is a good way to get your credit limit raised. I did, and got used to getting letters in the mail saying my credit limit had been raised.
I hit the wall at a $10,000 credit limit. But that was fine. What was I going to do with that kind of a limit?
On months that you’re not buying textbooks, make a budget, stick to it, charge as much of your budget as you possibly can, then pay it off. This builds your credit history.
Over time, you’ll get pre-approvals for more cards. Go ahead and get a second, then get its limit increased using the same tactic. Then get a third. You don’t need more than three cards. And if the idea of juggling three cards and paying three bills each month seems like too much to handle, don’t do it, and stick to one or two.
One more thing: My primary credit card is a rewards card. When I get enough rewards to cash in, I just apply them to my statement balance. That keeps me from blowing that money on something frivolous. To avoid interest charges, I still pay whatever is on the bill when it comes–the rewards go towards the next month’s balance.
Never charging more than you can pay off when the bill comes
Some months I run up several thousand dollars’ worth of a balance. This month is an example. Both cars needed a lot of expensive maintenance, and we got it all done this month. It’s all on the card. I’ll pay off the balance when it’s due in the middle of next month.
On any given month, I charge recurring expenses like gas, my phone bill, and common household staples, along with all business expenses. Some months my balance is $1,000 and some months it’s a lot more than that. It doesn’t matter because I’m not paying interest on it. I rarely, if ever, charge an impulse buy, and if I do, I know I have the money for it in the bank. If I don’t know, I don’t charge it. But if it’s a monthly budget item, I’m not shy about charging it.
While I agree that it’s easier to imagine things not costing money when you charge it rather than paying cash, by charging budgeted items, you can fight that pretty effectively.
To get better than an 800 credit score, get three credit cards, keep the balances on them below 1/3 of the credit limit, but use them regularly and pay them off. This is a better project for once you have a steady job with a predictable monthly income and benefits.
Gaming the system
Is this gaming the system? Absolutely. Then again, the rules are the rules. If you know the rules, you might as well make the rules work for you instead of against you.
And while I agree with the standard advice not to finance a car, or to pay it off as quickly as you possibly can if you do finance one, and to not carry credit card debt, let’s face it. You’re not going to wait to pay cash for a house. You will need a mortgage, and to get a decent rate on a mortgage, you need a credit history.
I know some people who did a lot of damage to their lives with credit cards. But by being careful with how I used them, credit cards helped improve mine.