Credit cards can be a little (or a lot) confusing, especially if you’ve never had one before.
They are not as simple debit cards and they carry the risk of accumulating debt with high interest rates. There is definitely a learning curve and you should take your time with it.
I recently wrote a story about credit cards that I recommended to my friends. One of those friends, an Army officer named Cat, was applying for her first credit card and had some questions for me. Some of my answers surprised her, and some most likely saved her money. Whether you’re also thinking about applying for your first credit card, or you’re still laying the groundwork for your credit card experience, here’s the advice I gave my friend.
Basic rules for credit cards
Before we get into the specific questions, let’s go over some basics of using credit cards responsibly. Without them, you could quickly find yourself in expensive debt.
- Do not charge more than you can pay back in full and on time each month. Imagine your credit card was a debit card, if that helps.
- Pay more than the minimum amount. Otherwise there is a risk of increasing interest charges, and I assure you: this is something that should be avoided. This is how people fall into the debt trap.
- Always pay on time. Late payments can cause your credit score to drop and will remain on your credit report for seven years.
- Understand the terms and conditions of your credit card. A credit card is a financial instrument. You cannot use a new instrument without first reading the manual.
1. Which credit card should I get?
Getting your first credit card is the first step in many people’s credit search. That was the case for Cat too. Without a credit history, card options tend to be more limited. That’s not necessarily a bad thing, as cards can be overwhelming. Additionally, a first credit card should be minimalistic so you can get up to speed without complicated rewards systems or elaborate perks.
I recommended two options to Cat: the Discover it® Secured Credit Card and the Capital One Platinum Credit Card.
Secured cards typically have lower credit requirements because you “secure” the credit line with an upfront refundable deposit. The Discover it Secured is Bankrate’s choice for the best secured card with a welcome offer. Discover automatically doubles any cash back cardholders earn at the end of their first year. The card offers 2 percent cash back at gas stations and restaurants (on up to $1,000 in total purchases each quarter) and 1 percent cash back on all other purchases.
My other suggestion was even simpler. The Capital One Platinum is a fairly bare-bones card. It doesn’t offer any rewards or attractive perks, but it also doesn’t require a deposit. And most importantly, you don’t need good credit to qualify. All of that makes the card a solid option for building credit—and it’s the reason Cat ultimately applied for it.
2. Does spending heavily on your credit card help your credit score?
After getting approved for the Capital One Platinum card, Cat had some questions about how to best use it and improve her credit in the process. She felt that high recurring charges led to a better credit score. She even wondered if she could put rent on her card.
In reality, the amount and number of transactions on a credit card are not a credit factor. Cat was surprised to learn this.
“Should I just put recurring bills on it?” she asked. “Like my streaming services and stuff? Is that enough per month to build credit?”
I encouraged them to do just that. It’s a fantastic practice for people who want to keep a credit card open to improve their credit score without actively using it for every single purchase. But there’s a little more to it than that, at least in terms of how it impacts healthy usage and increasing credit scores.
“So I can legally pay my $14 monthly payment and it’s the same amount as if I had used more?” Cat said. “For credit?”
And that’s when I decided to explain the concept of credit utilization ratio, which is the percentage of available credit a person is using. Using a large portion of a card’s credit limit won’t improve your credit score. In fact, it might actually do the opposite.
Experts strongly recommend keeping your credit utilization below 30 percent, or as close to 0 percent as possible. Otherwise, you risk losing some credit score points, as credit utilization is the second most important credit factor after payment history. The amount of a transaction itself doesn’t matter – what matters is how it affects your overall credit utilization.
For example, if you spend $200 on a card that has a $20,000 limit, that will increase your credit utilization by 1 percent. But if your credit limit is also $200, which is not uncommon with secured cards, your credit score could drop because you’ve now maxed out your card.
3. Can I pay my rent with my credit card?
Speaking of paying rent on your credit card, this is probably unwise, even if your credit limit is high enough or you pay off the rent quickly.
Landlords who accept card payments typically charge a fee of between 2 and 3 percent for such transactions. There are third-party services that allow you to pay rent with a credit card even if your landlord doesn’t offer this option. The fee is about the same.
According to a recent report from the U.S. Census Bureau, the average rent for a vacant apartment in the U.S. is $1,469. If you were to pay an additional 2.9 percent each month on top of that fee, you would be paying nearly $43 on top of your monthly rent—and $516 annually.
And another thing to remember: Putting rent on a credit card isn’t the only way to get it to count toward your credit score. Services like Experian Boost, for example, can help you add eligible rent payments to your credit report. There are limitations, such as which of your credit scores are affected (yes, you have more than one), but if you’re just starting out, every little bit helps.
4. Can I set up my card to be paid off automatically?
Cat’s next question was how she could make sure she never missed a payment – which made me happy. She wondered if she could set up her card to automatically pay her bill every month.
The answer is yes. This great feature is called autopay. Most credit card issuers offer it, and you can set it up online or over the phone. You can use it to pay the minimum amount, the full amount shown on your monthly statement, or another fixed amount.
This is a convenient way to make sure you always pay on time. It’s the best thing you can do for your credit. Not to mention, you’ll avoid late fees.
Still, autopay may not be for everyone. I only have it set up for the cards I don’t use frequently. For the cards I charge consistently, I prefer to go to the banking app and pay off the balance every week or so. This way I can monitor my spending more closely and make sure there aren’t any strange charges popping up in my transactions that indicate fraud. Plus, I find it easier to pay smaller amounts than to be hit with a larger bill once a month.
5. Does the interest rate matter if I pay off the entire balance?
Cat didn’t want to pay interest and had the right idea to avoid it. In fact, you won’t be charged interest if the entire balance of your monthly statement is paid off. So no matter what your interest rate is, you’ll have nothing to worry about if you consistently pay your card bill in full. Honestly, I don’t even know the interest rates on my cards – I just know they’re somewhere in the 25 percent range, and I want nothing to do with it.
The Credit Card Act of 2009 requires lenders to send you your bill at least 21 days before the due date. During this time, most credit card issuers allow an interest-free grace period. So interest is not charged immediately after a purchase unless you withdraw cash from your credit card, in which case the cash advance APR is charged immediately. This is different from your regular APR for purchases and is usually higher, so I would recommend avoiding these types of transactions.
Note that issuers are not legally required to provide a grace period, and I have seen cards that did not. Interestingly, such cards tend to be aimed at users with poor or no credit. Always read the terms and conditions to know what to expect.
The conclusion
“Credit cards are so weird,” Cat concluded when she finished asking questions. In fact, not everything about credit cards makes immediate sense. For example, I often get confused looks when I say that credit scoring models penalize you for using up your entire credit limit, which is, after all, the amount the bank is willing to lend you. I can imagine how ridiculous such things can seem to a new credit card user.
Still, a credit card is one of the most flexible and reliable ways to build credit if you use it responsibly. If you have questions, take the time to research — or shoot me a message at [email protected]. You can also find me on TikTok and Instagram.
