5 Mistakes to Avoid With Your First Credit Card

Introduction

Getting your first credit card is an exciting milestone. Welcome to a world of newfound convenience, potential rewards, and long-term credit building.

For most, that first credit card can be an opportunity to learn how credit works and how to use it responsibly. And since credit cards have been around for some time now, you can also learn from common mistakes that others have made in the past — without having to make those same mistakes yourself.

If you want to use a credit card effectively, these are some common mistakes you’ll want to avoid.

Missing a Payment on Your Credit Card

A missed credit card payment can have a surprisingly big impact your financial future, extending beyond the interest and late fees you’ll be charged.

Keep in mind that a credit card payment is considered late if you don’t pay at least the minimum amount due by the due date. This isn’t usually reported to credit bureaus, but interest and late fees may apply.

A payment is considered missed if you don’t pay for 30 days or more. This is where the long-term consequences start, since lenders do report missed payments to the credit bureaus.

That’s because payment history is the most important factor in your credit score. A single missed credit card payment can lower your credit score by 100 points.

Lenders use credit scores to make lending decisions, so a 100-point drop could lead to less favorable terms like higher interest rates or lower credit limits. You may even be less likely to be approved.

And lenders typically charge a late fee if you don’t pay the minimum amount due by the due date, so you‘ll have to pay that. Plus, you’ll have to pay interest on your credit card balance — and that interest rate could go up after 30 days past due.

Luckily, there are a few simple tips for avoiding late or missed payments.

Most credit card companies offer some form of AutoPay, so you can set up automatic payments for the minimum amount due, the full balance, or a custom amount, every month.

Text, email or app notification reminders are another common feature offered by credit card issuers. These can help you remember an upcoming payment or confirm that a payment went through.

And if your payment due date doesn’t work for you — perhaps because you have irregular income or other bills coming in around the same time — you can often change it.

Overextending Yourself

Your new credit card can make a lot of things easier. But easy doesn’t necessarily mean hands-off. To use your credit card effectively, it’s a good idea to make a budget and determine how much you can truly afford.

If you spend more on your credit card than you can pay back by the due date, you’ll have to pay interest on the balance you carry over to the next month. That’s interest you wouldn’t have had to pay if you’d stayed within budget that month.

And while you’re thinking about how much you can spend on your card, there’s another aspect to consider. And this one can affect your credit score.

Your card has a credit limit, sometimes known as a credit line. At first, you might think it’s fine to use the whole thing. But it turns out that using all your credit isn’t the best move for your credit score.

This stems from something called credit utilization ratio, which measures how much of your available credit you’re using at any given time. This ratio is in second place after payment history in the factors that make up your credit score.

If you use all or most of your available credit, potential lenders may take it as a sign that you have issues managing your current debt. They would be taking on more risk by extending credit to you.

For this reason, many experts recommend using less than 30% of your revolving credit, and under 10% if possible.

Treating Credit Cards as Free Money

You’ve probably heard the phrase “what goes up must come down,” sometimes attributed to Sir Isaac Newton explaining gravity.

If we were to do the same for credit, we’d go with “What is borrowed must be repaid, plus applicable interest.”

Ours isn’t as catchy as Newton’s, but it can help remind you that a credit card isn’t a supply of “free money.”

If your credit card has a grace period — and most do —  you won’t be charged interest as long as you pay the full balance due by the payment due date.

But let’s say you use your credit card for a month and then you only make the minimum payment. The balance you carry into the next month will be charged interest, based on the card’s APR (annual percentage rate).

When you carry a balance, you’re paying for the privilege of borrowing that money from the card issuer. And if you carry a balance regularly, you’re also paying for that privilege regularly. That’s about as far from “free money” as it gets!

Choosing the Wrong Credit Card for You

When you’re signing up for your first card, there’s more to compare between options than their names and designs.

Some things to know about a card before applying include the annual fee (if there is one), the card’s interest rate and what rewards or benefits it offers.

The right card fits into your lifestyle. A card that earns great rewards on plane tickets and comes with a hefty annual fee could be worth it for a frequent traveler, but wasteful for someone who stays close to home.

It can help to do some research before picking your first credit card or even take advantage of tools like pre-qualification or card choosers offered by many credit card issuers.

Not Taking Advantage of Your Card Benefits

You might hear about credit card rewards more often, but it’s worth knowing about some lesser-known credit card benefits, especially when you first apply for a card and as you continue to use it.

Some of these are small perks, like how some cards give you early access to purchase event tickets.

Others can save you time and money. There are cards that give you access to a travel concierge service or extend the warranty of certain products.

And then, there are benefits that you probably won’t use frequently, but you’ll still be glad to have it.

An Auto Rental Collision Damage Waiver is a type of coverage for rental cars that covers the full value of the car in case of theft or collision. At the very least, that’s some added peace of mind, but it could also save you a pretty penny.

Bottom Line

Getting your first credit card is a big deal. It’s both an achievement and a new responsibility. But don’t let that stress you out.

If you keep these tips in mind, you’ll be on the path to building up your credit and the financial future you want.

Are you looking for a first credit card to start building your credit history? See if you pre-qualify for one from Credit One Bank. It only takes a moment and it doesn’t affect your credit score when you check.