Tips for a first-time credit card owner

This was originally published on Monday, October 27, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I was just approved for my first credit card. I’m excited that I’m now creditworthy, but numerous people have expressed to me that owning a credit card has put them in some financial troubles. Do you have any tips for a first-time credit card owner?

Answer: Congratulations on your first credit card! Yes, owning a credit card is opening a whole new world of financial responsibilities. It’s true that credit cards can lead some to financial hardship if spending goes out of control. But if used properly, it also can be a beneficial financial tool. Using a credit card wisely can improve your credit rating, which can qualify you for low interest rates when purchasing a car or a home, or it may help get a job. Here are some tips to keep you on the right financial path.

•  Know your monthly limit. Take some time to review your budget to see how much you can afford to spend monthly. Remember that the credit card company will charge you interest on the balance of your card.

• Never skip a payment. It’s best to pay the balance of your card off every month. Credit card companies make money not on what you owe but the interest it accrues. If you cannot pay the full amount, at least make the minimum payment. But do not get in the habit of paying just the minimum balance. Paying the minimum balance can take years to pay the balance off and in the end, you would have paid more in interest than the amount you originally owed. Read your contract carefully. There usually is a different interest rate for cash advances on your card. Missing a payment could result in a late payment fee and a negative hit on your credit score.

• Use it responsibly. A credit card should be used with caution. If you have cash on hand, it’s best to use the money first. Use the card for needs and not extravagant wants. Credit cards can be used in emergency situations. Try not to go over the monthly limit you set for yourself.

• Use your rewards. If your card has a reward system, take full advantage of it. Some may offer cash back that you can use toward your payments. Others may offer gifts and some may earn airline mileage. Most of the time, these rewards have a time limit of when you can claim them. Read your contract. You earned those rewards, so you should cash in on them.

• Remember 30 percent. Keep this number in the back of your mind. It’s the optimum percentage of your credit utilization ratio. This ratio is your total credit available to how much credit you are using. This ratio weighs heavily on your credit score. If the ratio is low, it positively affects your score. If it’s higher than 30 percent, it will bring your credit score down. For example, if your credit limit is $1,000, you should not carry a balance over 30 percent or $300. If later on in years you decide to get another credit card, the combined total of your cards and the balance you have should stay at 30 percent or lower. In other words, if you have a two cards that have a combined total of a $5,000 credit limit, your combined balance should not exceed $1,500.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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