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Credit Card Tips for Beginners
Looking to get your first credit card? There’s a good chance you may be overwhelmed with information about how they work. Credit cards are a great foundation for establishing and building a good credit history but using them wisely is key to maximizing their benefits.
Whether you're just starting out or you are looking to refine your credit card habits, understanding how to use and manage credit cards could help with financial stability.
Let's look at some essential credit card tips.
Understanding credit basics
Before you start using your credit card, it's important to understand some key concepts. Knowing the basics can help you manage your credit card effectively and maintain a healthy credit profile.
Your credit score and what it means
Your credit score is a prediction of your credit behavior, such as how likely you are to pay your financial commitments like loans on time, based on your credit reports.1 Scores are issued by data analytics companies, such as FICO®,† and VantageScore,®,† based on your credit reports.
The most common types of credit scores range from 300 to 850, with higher scores indicating better credit health. A good credit score can help you qualify for lower interest rates on loans and credit cards, while a poor score can limit your financial options.
Your credit score is one of many important factors that lenders consider when deciding whether to approve you for credit cards, car loans, mortgages and other types of loans. A higher credit score increases your chances of approval and also helps you to qualify for lower interest rates. For big-ticket purchases, like a home or car, having a good credit score can make a difference in the terms you receive.
How your FICO® credit score is calculated
Understanding how your credit score is calculated can help you make decisions about improving it. Let's explore the key factors included in calculating your FICO® credit score2:
- Payment history (35%). This is the most significant factor and includes your record of paying bills on time
- Credit utilization (30%). This is the percentage of your available credit that you’re using. Keeping this ratio around or below 30% is generally recommended. This indicates that you are not over-extended, and the use of credit is not straining your total financial resources
- Length of credit history (15%). This measures how long you’ve been using credit. Longer credit histories are typically viewed more favorably
- Types of credit used (10%). Having a mix of credit types (like credit cards, personal loans, and mortgages) can positively impact your score
- New credit (10%). This is based on recent credit inquiries and new accounts. Opening too many new accounts in a short period can be seen as risky behavior
Credit limit
Your credit limit is the maximum amount you can charge to your credit card. Exceeding this limit may result in fees depending on the credit card issuer and could negatively impact your credit score. To maintain a good credit score, you should stay well below your credit limit and manage your spending wisely.
Paying in full vs. minimum balance
Paying your credit card balance in full each month helps you avoid interest charges and keeps your account debt free. The minimum payment is the smallest amount you’re required to pay to keep your account in good standing. However, paying only the minimum increases the time it takes to pay off your balance and makes you pay interest charges over a longer period of time, if your balance is subject to interest. If you can't pay off your full balance, paying more than the minimum will help to reduce interest costs.
Interest rates
Credit card interest rates, which are typically stated as the yearly rate, annual percentage rates (APRs), are the price for borrowing money. Interest is typically charged on credit cards if you carry a balance from one month to the next. Interest rates can vary based on your creditworthiness and the type of card. It’s important to be aware of your card’s APR and strive to pay off your balance each month to avoid interest charges.
Know your spending habits
If you want to make the most of your credit cards, be aware of your own financial limitations and spending habits.
- Don't spend more than you can pay back. To avoid accumulating debt, only charge what you can afford to repay within the billing cycle
- Plan for big purchases. You might use a rewards card to make large purchases so you can pile up the rewards. That's not a bad idea—but only if you have a budgeting plan to pay off those purchases quickly and avoid high-interest debt
- Use with moderation. You should aim to use no more than 30% of your credit limit. This practice helps build a strong credit history and improves your credit score
Pay on time and aim to pay in full
Timely payments are important for maintaining a healthy credit profile. Here are some card tips for the payment side of the ledger.
- Missed payments. One of the worst things you can do for your credit score is miss payments. It marks your credit history and can lead to late fees and paying more in interest charges, plus the card issuer might increase your APR
- Automatic payments. To make sure you never miss a payment, consider setting up automatic payments. If you want to go beyond the autopay amount, you can always make additional payments online, through an app, by phone or through the mail. You can also set up different autopay options like the full statement balance, minimum balance or a specific amount
- Pay in full. The best way to avoid interest charges and strengthen your debt management is to pay your balance in full each month
- Go beyond the minimum payment. If paying in full isn’t possible, try to pay more than the minimum credit card payment. Your statement will show how long it would take you to pay off your balance by making the minimum payment and how much you would pay in interest. It's a costly way to go
Review your statement regularly
Regularly reviewing your credit card statements is an important part of effective money management and maintaining financial stability. Here’s why it’s important and how you can do it effectively:
- Fraudulent charges and errors. If you don't review your statement every month, you might not catch unauthorized or fraudulent transactions. Fraudsters can sometimes gain access to your credit card information and make charges without your knowledge. Merchants might make a mistake and charge you twice for something or forget to post a refund for a returned item. By checking your statement regularly, you can spot these charges and report them to your credit card issuer promptly. This helps to minimize any potential financial loss and helps to keep your account secure.
- Tracking subscriptions. Checking your statement allows you to review the number of subscriptions and services you pay for each month. You could save money by cancelling streaming services and memberships you never use or didn't even realize you were signed up for.
- Notifications. Many credit card issuers offer the option to set up alerts for unusual activity or transactions. These notifications can be sent via email or text message and can help you stay informed about your account status in real time. Setting up these alerts will make you immediately aware of suspicious activity so you can address problems quickly.
- Review your rewards and benefits. If you can earn rewards or benefits, your statement will detail how much you’ve earned. Regularly checking this information helps you track your rewards balance and understand how close you are to redeeming them. It also enables you to take full advantage of any rewards or benefits.
Know your credit score and credit report
Your credit score and credit report are key indicators of your financial health. The information can give you valuable insights into your financial habits, help you make smarter decisions, and set you on a path toward financial independence. Here are some tips on how to keep a close eye on both:
- How to check your credit report. You are entitled to a free credit report from each of the three major credit bureaus — Equifax,®,† Experian™,† and TransUnion®,† —once a year through AnnualCreditReport.com.† It’s a good practice to stagger these requests so you receive one every four months from a different bureau. For example, Equifax in January, Experian in May, and TransUnion in September.
- Understanding your credit report. Check each credit report thoroughly to make sure that all the information is accurate and up to date. Mistakes in your report, such as incorrect account balances or payments marked as late when they weren’t, can harm your credit score. Check for missing things, too, such as loans that you have been managing properly or paid off on schedule. To correct an error and dispute information on a report, contact the credit bureau and provide documentation. Follow up until the issue is resolved. Correcting these errors quickly can help improve your credit score.
- Track your credit score. Many financial institutions will give you easy and free access to your current credit score. Some credit card companies will include it on your monthly statements. There also are a number of personal finance websites that enable you to sign up to receive free credit score reports. Monitor your credit score regularly to see if your good financial habits are causing it to rise. You also want to notice any unexpected drops so you can look into them as soon as possible. This is especially important if you are planning to apply for a new credit card or some other loan.
Credit Cards offered at TD Bank
Effectively paying off credit card debt involves choosing the right strategy for your financial situation. The right credit card account from TD Bank can help you achieve your financial goals.