Credit cards can be a little (or very) confusing, especially if you’ve never had one before.
They’re not as straightforward debit cards, and they come with the risk of racking up high-interest debt. There’s definitely a learning curve, and one you’d be wise to take your time with.
I recently wrote a story about credit cards 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 others most likely saved her money. Whether you’re also thinking about getting your first credit card or still building the foundation for your approach to credit cards, here’s the advice I gave my friend.
Credit card ground rules
Before we dive into the specific questions, let’s go over a few basics of responsible card usage. Without these, you might quickly find yourself in expensive debt.
- Don’t charge more than you can pay off in full and on time each month. Pretend your credit card is a debit card if that helps.
- Pay more than the minimum. Otherwise, you’re running the risk of mounting interest charges, and I assure you: it is to be avoided. That’s how people end up in debt.
- Always pay on time. Late payments can cause your credit scores to drop, and they stay on your credit reports for seven years.
- Understand your credit card terms. A credit card is a financial tool. You can’t use a new tool without reading the manual first.
1. What credit card should I get?
Getting a first credit card is the first stop on many people’s credit journey. This was true for Cat, as well. Without a credit history, card options tend to be more limited. That’s not necessarily a bad thing since it’s easy to get overwhelmed when it comes to cards. Plus, a first credit card should be minimalistic, allowing you to get your feet wet without complicated rewards systems or intricate benefits.
I recommended two options for Cat: the Discover it® Secured Credit Card and the Capital One Platinum Credit Card.
Secured cards typically have relaxed credit requirements as you “secure” the credit line with an upfront refundable deposit. The Discover it Secured is Bankrate’s pick for the best secured card with a welcome offer. Discover automatically matches all the 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 combined purchases each quarter) and 1 percent cash back on all other purchases.
My other suggestion was even simpler. The Capital One Platinum is a rather 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 that makes the card a solid option for credit-building — which is why Cat ended up applying for it.
2. Does spending a lot on your credit card help your credit score?
Once Cat was approved for the Capital One Platinum, she had some questions about the best way to use it, and how to strengthen her credit report in the process. She was under the impression that making big recurring charges led to higher credit scores. She even wondered if she could put rent on her card.
In reality, the amount and number of transactions on a credit card isn’t a credit factor. Cat was surprised to learn that.
“Should I just put recurring bills on it?” she asked. “Like my streaming services and stuff? Will that be enough times a month to build credit?”
I encouraged her to do just that. That’s a fantastic practice for people who want to keep a credit card open to benefit their credit without actively using it for every single purchase. But there’s a bit more to it, at least in terms of how that factors into healthy usage and a growing credit score.
“So I can legit do my $14 a month payment and it’ll be the same as if I used more?” Cat said. “For credit?”
And this is when I decided to explain the concept of a credit utilization ratio, or the percentage of available credit a person uses. Using a large portion of a card’s credit limit won’t help your credit score. In fact, it might just do the opposite.
Experts strongly recommend keeping your credit utilization under 30 percent, or as close to 0 percent as you’re able. Otherwise, you risk losing some credit score points since credit utilization is the second most influential credit factor after payment history. The amount of a transaction itself doesn’t matter — it’s how it’s affecting your overall credit usage that matters.
For example, if you spend $200 on a card with a $20,000 limit, that adds 1 percent to your credit utilization ratio. But if your credit limit is also $200, which isn’t uncommon for secured cards, your credit score might take a dip as you’ve now maxed out your card.
3. Can I put my rent on my credit card?
Speaking of charging rent to your credit card, it’s probably unwise even if your credit limit is high enough or if you’ll pay it off quickly.
Landlords that allow card payments usually add a fee between 2 to 3 percent for such transactions. There are third-party services that let you pay rent with a credit card even if your landlord doesn’t offer this option. The fee is about the same.
The median asking rent for a vacant apartment in the U.S. is $1,469, according to a recent report by the U.S. Census Bureau. If you were to pay an extra 2.9 percent on this charge every month, you’d pay almost $43 on top of your rent monthly — and $516 annually.
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If you’re set on paying rent with a credit card, look into the Bilt Mastercard. It earns 3X points on dining, 2X points on travel, and 1X points on other purchases. It also gives you up to 1x points on rent payments without the transaction fee (up to 100,000 points each calendar year). You’ll need to use the card at least five times each statement period to earn the maximum amount of points. Note, however, that the Bilt Mastercard requires good or excellent credit, so it’s not likely to be an option for credit builders.
Another thing to consider: putting your rent on a credit card isn’t the only way to make it count toward your credit. For instance, services like Experian Boost can help you add eligible rent payments to your credit report. There are restrictions, such as which of your credit scores are affected (yes, you have more than one), but when you’re just starting out, every little bit helps.
4. Can I set it up so that my card is paid off automatically?
Cat’s next question was about making sure she never misses a payment — which made me happy. She wondered if she could set up her card so that her bill is paid off automatically every month.
The answer is yes. This lovely feature is called autopay. Most credit card issuers offer it, and you can set it up online or over the phone. You can have it pay the minimum, full amount posted on your monthly statement or any other fixed amount.
This is a convenient way to ensure you always pay on time, which is the best thing you can do for your credit. Not to mention, you’ll avoid late fees.
Still, autopay might not be for everyone. I only have it set up on the cards I don’t use frequently. For those I charge all the time, I prefer to go to the banking app every week or so and pay off the balance. It allows me to monitor my spending more closely and make sure no strange charges appear in my transactions indicating fraud. Plus, I find it easier to pay in smaller amounts than be hit with a larger bill once a month.
5. Does the interest rate matter if I pay off the entire balance?
Cat wasn’t looking to pay interest and had the right idea about avoiding it. Indeed, you won’t be charged interest if the entire balance from your monthly statement is paid off. So, whatever your interest rate is, you won’t have to worry about it if you consistently pay your card bill in full. To be honest, I don’t even know the interest rates on my cards — I only know they’re somewhere in the 25 percent territory and I don’t want to have anything to do with them.
The Credit CARD Act of 2009 requires lenders to get your bill to you at least 21 days in advance of when it’s due. During this time, most card issuers provide an interest-free grace period. So the interest doesn’t kick in immediately after you make a purchase unless you take out cash from your credit card. In this case, cash advance APR will apply immediately. This is different from your regular purchase APR and is usually higher, so I’d recommend avoiding this type of transaction.
Note that issuers aren’t legally required to provide any grace period, and I’ve seen cards that don’t. Interestingly enough, such cards tend to target users with bad or no credit. Always read terms and conditions to know what to expect.
The bottom line
“Credit cards are so weird,” Cat concluded when she was done with questions. Indeed, not everything immediately makes sense when it comes to credit cards. For instance, I often get bewildered looks when I say credit scoring models penalize you for using all of your credit limit. After all, that’s the amount of money the bank has agreed to lend you. I can imagine how nonsensical such things might appear to a new credit card user.
Still, a credit card is one of the most flexible and reliable ways to build credit when you use it responsibly. If you have any questions, take your time to do research — or drop me a line at anastaples@bankrate.com. You can also find me on TikTok and Instagram.
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