You’ve probably heard the rumors that credit cards are the root of all financial evil.
They have a really terrible reputation, but that is simply because people don’t use them correctly. In all reality, credit cards are a really great tool for improving your credit score. They also can have really great benefits that allow your money to work harder for you. I got my first credit card when I was eighteen, at the advice of my father. From the get-go, I used all of the right strategies to ensure that having the card would only benefit me in the long run.
Today, I’m going to take you through my strategy for using credit cards.
I’m not far along in my finance journey, but my credit score is my pride and joy. This is how I keep it as high as it is.
First, I only spend money that I have.
When people think about credit cards, the first thing they think about is the balance they hold. The monthly balance on my credit card is currently $2000. This means that in any given month, I could charge up to $2000 on the card. Many people who hold credit cards think of the balance more as free money. They’ll spend the full $2000, which they ultimately can’t pay back. When no payment is received that month, they start to owe interest on the full amount. This person will keep spending more money they don’t have. Interest will build on the amount they owe, until they are in tens of thousands of dollars of debt.
As soon as my shiny new Discover card came in the mail, my father told me not to do this. Some people don’t receive this education, but I was lucky to. He told me to use it for any normal purchase I would make on my debit card, and then pay it off at the end of every month. My dad also made sure that I knew to only spend money that I had immediately. If I had $500 in my checking account, I was not to spend more than $500 on my credit card. This way, I could always pay the bill when it was due.
That’s pretty much exactly how I do it to this day. I’ve added in a few extra rules for myself, but that’s the gist. Any money I would normally spend on my debit card, I put on my credit card instead. I don’t use it for big purchases or bills, such as rent. That just comes straight out of my account, so that I’m never spending too much money on the card. Mostly, the expenses on my credit card end up being for my groceries and entertainment costs.
Next, I only use a certain amount of my balance.
In order to give my credit score the most boost, I tend to only use my credit card for a maximum of $600. Your credit score contains a section called “revolving utilization”, which is essentially the amount of your balance you use each month. To create the best credit score possible, you should only use 33% of the balance of any given card. For instance, my balance is $2000. 33% of $2000 is $660. Once I spend $600 on my credit card, I begin putting my purchases back on my debit card. There have been a few months where I didn’t do this, and my credit score decreased by a fairly substantial amount in those months.
If your credit card balance is $1000, you should only use $330 of your balance. If it’s $1500, you should use $495. I’m sure you get the point by now, but I figured a few more numbers might help as a frame of reference.
Finally, I always pay my bill on time.
To be entirely honest with you, I actually pay it as soon as I get the notification that my statement is ready to be viewed. This way, I will never forget. It’s a super easy method to implement–it just requires turning on notifications from your credit card provider. My statement pretty much always becomes available on the 18th of the month, and then it’s due on the 11th of the next. In essence, my bill is always paid three weeks ahead of time.
Voila! There you have it.
That is my exact methodology for using my credit card. So far, I only have one. I’ll probably open a second relatively soon. Currently, I have a Discover It Student card, but I would love to open one with travel benefits. I have loved my Discover one, so I’m hoping to keep that one open too. There are so many benefits to holding credit cards
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