Are you excited by getting your first credit card, as if whatever you charge is magically free and the credit card is some kind of license to spend? That mindset could automatically start you off on the wrong foot with your credit.
According to an Experian Survey released last year and updated in 2016, the millennial generation (which includes you if you’re in your 20s, when you’re most likely to get your first credit card) has the lowest credit scores out of all the generations. In fact, 67% of those polled did not understand how credit scores are computed and they have a habit of thinking their debt is not as bad as it is and that their credit scores are better than they are.
According to the Experian score categories, a good (prime) credit score falls between 661 and 780 but the surveyed millennials thought their score was 654 (considered non-prime credit) when it was really 625 (dangerously close to the sub-prime credit score cut-off at 600).
In 2016, 68% of millennials were carrying debt (including student loan debt), more than half had already had problems spending and making payments on their credit cards and 64% believed their debt is holding them back from achieving their life goals.
Here’s what you must know before you whip out that new credit card, swipe it for the first time and make millennial credit card mistakes that could possibly screw up your credit.
Your credit card is not cash (for when you don’t have any)
Getting a credit card should not change your financial situation or your monthly budget in any way (although handling credit responsibly will earn you the best interest rates when you go to borrow money for a future car loan or mortgage).
Many people mistakenly treat their credit cards as an extension of their income and purchase things they want or need with a credit card when they don’t have the cash.
When you spend more than you can afford to pay by the payment due date, you carry the balance to the next month and the interest rate is charged and added to your balance which makes the balance grow. It is easy to max out your credit cards very quickly this way, which happens when you hit the spending limit on the card.
This puts stress on your budget and causes your credit score to go down substantially as lenders like to see a history of credit use that is at least below 30% (and often below 15%) of the credit available to you.
The only way to avoid this negative spending pattern is to only charge what you can afford in cash and pay it all off before the payment due date and the only reason is for building a good credit history.
Your credit card is not an emergency fund
Many people say they got a credit card to use “only for emergencies.” In fact, the Experian data found that nearly half (46%) of millennials maxed out a credit card by using it for an emergency. Even if you only used it for true emergencies (flat tire, burst water heater, medical deductible payment) your balance would build quickly and the interest charged would cause it to compound and grow even higher every month, making it difficult to pay off and impossible to use for the next emergency.
Responsible credit use means protecting yourself from charging on credit cards for emergencies by saving up a cash emergency fund. Even a few hundred dollars to start can cover common car emergencies such as flat tires and new batteries.
Due dates are not a request
According to a 2012 VantageScore report about how credit behaviors affect credit scores, one late credit payment can cause your credit score to drop substantially (from 60-120 points) into the next lowest credit category depending how high your starting credit score was and whether you missed the heavier-weighted auto loan, mortgage or student loan payment. The longer it takes to make that payment (30 days versus 90 days), the deeper your score drop and your score will continue to decrease as long as your payment is not received. Late payments are a huge part of your credit score (representing 35% of a FCIO credit score). As shown by the VantageScore report, it can take approximately a year to recover your credit score from a missed payment once the account is up to date on payments.
But ruining your credit is not the only problem with paying late as it can affect your balance substantially, too. Due dates are actually a demand for payment by that date (not a request) and most credit card issuers charge late payment penalty rates and fees. Late fees are capped by law at $27 for the first offense and as high as $37 for repeat late payers. Card issuers can raise your interest rate (called a penalty rate or the default rate) up to 29.99% on new purchases for missing a payment and after 60 days of a missed payment, that penalty rate can be applied to your entire balance owed.
Always make payments before the payment due date.
Paying just the minimum payment due is not responsible credit use
This is no secret. Bold type on top of the billing statement on my Capital One credit card reads:
“If you make only the minimum payment each period, you will pay more
in interest and it will take you longer to pay off your balance.”
Because paying your bills on time, as we just discussed above, represents a big portion of your FICO credit score you (like 42% of other millennials surveyed) may think paying your minimum payment on time each month is all you need to do.
But, the minimum payment due only represents the lowest amount your card issuer will accept on your balance, which often only amounts to about 3% to 5% of your total balance. Most of your minimum payment goes to paying down interest and fees which means you will be carrying debt that is hardly reduced (if no other fees or purchases are added) while making your minimum payments.
Always pay more than the minimum due when trying to pay off a balance. A best practive is to pay off the balance in full each month to avoid paying any interest or late fees.
How to avoid making mistakes with your first credit card
Careless spending can get you into credit trouble. In 2016, the Experian survey found 53% of millennials did not know their interest rate, 32% did not know their spending limit and 29% had already maxed out a credit card. Of those who maxed out a card, 39% did so because they were unaware of their spending limit and 38% were not aware of how much they were spending. Don’t let that be you.
Once you receive your new credit card in the mail, note your payment due date and find, review and save the Schumer Box included in your new credit card agreement. This grid shows you all the pertinent facts about the credit card including the interest rate, introductory rates and when they end, credit limit, annual fee, grace period, fees, penalties and more. Note your credit limit, interest rate and grace period and mark your payment due date down in a calendar or set up payment due alert texts so you never miss a payment or max out your new credit card.
According to the Experian data, more than one in every three millennials also thinks it is unnecessary to check their credit report or their credit score, but once you have a credit card you want to be sure your account is being reported to the credit bureaus accurately. Check your credit reports yearly at annualcreditreport.com (the only free service authorized by federal law), monitor your credit score monthly for any substantial changes at one of the free credit score services and learn more about how you can use credit to your advantage.
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