As you continue your credit journey, you’ll want to consider opening a credit card account. Credit cards can be a powerful financial tool in helping you increase your score and come with excellent perks and rewards, but they also come with the risk of overspending and can hurt your financial health if misused. You’ll need a strong budgeting plan to ensure you get the most out of your credit cards.
Here are some of our top tips on budgeting with credit cards.
Pick the right credit card
If you’ve recently gotten a credit score, you might start to get credit card offers in the mail. While it might be tempting to apply for the first card you see, research the right card for your lifestyle.
If you’re starting to build credit, you might only initially qualify for a secured credit card. A secured credit card works like a standard credit card, but instead of getting a line of credit from the bank, the credit comes from the cash you put down. So, if you put $500 onto your secured card, the limit will be $500.
If you use your card responsibly for a few months, the bank may offer you an unsecured card, meaning the line of credit comes from the bank itself. Before you accept, check the card terms to make sure they’re right for you.
Does the card have an annual fee? If so, think twice. What’s the APR on the card? The average APR for US credit cards is 15.6-22.9%, but the overall APR will be based on your score. Are there rewards attached to the card? Check to make sure that they’re relevant to your lifestyle. For example, a travel rewards card can help you save on your next trips if you like to travel.
Having the right credit card is the essential first step in credit card health.
Know where your money is going
When you get your credit card, it will come with a credit limit, the maximum amount of money you can charge to the card at once. However, just because you have access to a certain amount of credit doesn’t mean you should spend up to your limit every month. Living within your means and sticking to your budget is still important. Overspending is one of the fastest ways to lose control of your financial health.
If you’re new to budgeting, remember there is no one way to budget. Though there are many schools of thought on budgeting and saving, one of the easiest ways to start is by using the 50/30/20 rule. About 50% of your income should be used for “needs,” essential expenses like rent and groceries. No more than 30% of your income should go to “wants,” discretionary spending like nights out and subscriptions. Finally, 20% of your income should go towards savings, like an IRA or savings goal. With a 50/30/20 budget, you don’t have to focus on multiple line items, just three broad categories.
Try our Esusu Spending Planner to see if a 50/30/20 budget system works for your goals!
Keep an eye on your account
Credit cards can positively impact your financial health, but mismanaging your account can have long-lasting adverse effects. Knowing how to use your account correctly from the beginning is vital.
First, you should always pay off your monthly balance in full every month. This is the best way to avoid interest charges and keep your account current. If you follow the 50/30/20 rule we mentioned above, this should be easy to track.
If you can’t pay your balance in full for whatever reason, aim to pay as much as possible, at least the minimum payment set by your bank. Missing a payment on your credit card will negatively impact your credit score in a big way, and the effects of the missed payment can stay on your report for up to seven years.
It’s essential to keep a balance on your credit card as low as possible. Maxing out your card (using the entire credit limit) can indicate to lenders that you’re not responsible for credit and can affect your score. Most guidance says that you should never use more than 30% of your credit at a time. You can read more about lowering your credit usage on our debt and utilization rates blog.
Credit cards can be a powerful tool to build wealth if used correctly. Strong budgeting skills are a surefire way to ensure your credit is working for you.