1. Get your first credit card from your bank
Whether you’re a student or someone looking to have their first credit card, getting your first credit card from a bank that you already have an account with is usually a good idea. This is because it arguably eases the credit card application and approval process since although you do not have any credit history yet, you are a customer of the bank who already has your financial information on file.
If you are a student with no significant annual income yet, you should start off by applying for one of the credit cards in your bank that is specifically marketed towards students, since your chances of getting approved for one will be quite high. Most student credit cards from the big banks are pretty much comparable to one another, where common perks typically range from cashbacks, reward points, or airline miles. The same applies for many other credit cards with little or $0 annual fees.
It would be excellent if you are able to find a credit card that is suitable to your needs, but you have to be open to the idea that the first credit card that you are getting might not be a card with all the perks you are looking for. If this is the case, it shouldn’t be a concern at this point because once your credit score and payment history are good enough, you would be able to switch into a different (better) card or get approved for another one.
2. Make regular payments to your credit card balance
I am an advocate of making regular payments to your credit card balance, and by regular, I don’t mean monthly payments after you receive your credit card statements—I mean paying it off every other week, so perhaps two times or so a month. There are three good reasons for this:
- It helps with avoiding making late payments, which would otherwise result in your credit card balance accruing interests.
- It also helps you to keep track of your spending, which is a good practice in managing your personal finance.
- Lastly, it helps keep your credit card utilization rate low, which will improve your credit score. If you are wondering what a credit card utilization rate, it is essentially the usage percentage of your credit card limit. For example, if you have a credit card limit of $1,000, spending $300 on the card means that you have a credit card utilization of 30%. 30% is oftentimes the recommended balance to carry on your credit card, as keeping the utilization rate at or under this percentage will help improve your credit score in the long run.
Now, going back to the point on keeping your credit card utilization low by paying off your credit card balance every other week. If you were to spend $150 every week in a month for example, paying off $300 every second week will keep your utilization rate between the 0–30% range. If you were to make only a single payment every month, your utilization rate will hover between the 0–60% range in said month. This is a slight oversimplification as different banks will have different credit usage reporting dates, but:
3. Avoid spending what you do not have
If you want to spend $500 on your credit card, it is better for the long run if you can first ensure that you have more than $500 in your bank account. Thinking something along the lines of, “I’ll spend now and I’ll come up with the money later,” is the start of a credit card debt, and it can be hindrance to building your credit score properly.
If you really want to spend that money, then it should be preferable to come up with that money first, use your credit card to buy it, and then pay the balance off with the money you have in your bank account.
If you really need to spend that money, then use your best judgement to decide whether it is worth it to go into debt.
4. Treat credit card as a tool to get a lifestyle you want in the long run, not to spend the money you don’t have in the short run
This is an extension to the point above, where if you were to get a credit card, your goal should be to improve your credit score so that it would be easier for you to get a mortgage (with better interest rates) if you are thinking of purchasing a home down the road, and/or be eligible for higher-tier credit cards with worthwhile perks. As previously mentioned, the first credit card you get may not have all the perks you are looking for, but building a good credit score from that credit card will help you when you are looking to apply for higher-tier cards, such as cards with better cashback rates, higher reward points to exchange for products/services, or even perks like free airport lounge passes and hotel loyalty status.
Spending money for wants (not needs) for the short run by going into credit card debts does not do the above—it arguably does the opposite. Small debts can easily snowball into larger debts due to interest rates, and improving your credit score would be something that is pushed down and further down your priority list if they remain unpaid.
The ability to own a credit card in the first place is an asset, but not understanding or misusing it can turn it into a liability.
On the contrary, understanding and using it properly can help grow your asset, because having a good credit score makes it easier to support the lifestyle you want in the long run.
5. Apply for only one credit card at a time
If you are someone who has done pretty much most of the above and is now looking to apply for more credit cards, go ahead! But, exercise some restraint and don’t go around applying for multiple cards in a month. Every time you apply for a new credit card from different financial institutions, your credit score takes a small hit. Having multiple credit card applications in a short timeframe will knock down your credit score significantly and it signals to financial institutions that you appear to be desperate for credit, which can lead to a higher chance of rejection on your applications. If you are looking to apply for multiple credit cards, it is best to space out your applications, perhaps 6–12 months after your last one.
6. Consider switching credit cards instead of applying for a new one
Switching a credit card means that you are switching from one credit card into another in the same financial institution. For instance, if you have an RBC Cash Back Mastercard and you would like a RBC Avion Visa Platinum instead, you would be better off calling your bank and tell them that you would like to do a credit card switch instead of submitting an application for the new credit card that you want. This is because unlike applying for a new credit card, switching credit cards do not typically affect your credit score (you can always confirm this with your financial institution). If you have a good payment history for the existing card you have, your financial institution may even approve the switching to a higher-tier credit card that requires a certain threshold of annual income without requiring any proof of income.
Switching credit cards can only be done if both cards are within the same financial institution, so if you are looking to have a credit card from another financial institution, you would have to submit an application, in which your credit score will take a small hit as previously described.
7. Keep your oldest credit card
Your credit score is partly determined by the length of time you have been given credit, so keeping your oldest credit card around may serve you well to improve or at least maintain your credit score. However, if your next oldest credit card is only six months younger and you’ve owned credit cards for a couple years, cancelling your oldest credit card wouldn’t be a huge deal in this case.
If you are hesitant to keep your oldest credit card because it has an annual fee, or it doesn’t have the perks that you like, then you can consider switching the credit card into a different one. Switching a credit card into another would keep the same credit line active, and your credit score will remain unaffected from this.
8. If you are offered a credit limit increase, take it
Financial institutions review their customers’ credit card accounts every now and then. If they deem that it’s justifiable for them to offer you a higher credit limit, consider accepting it because this will help you to keep your credit card utilization rate low. For example, if you have a credit limit of $1,000 and you are spending $300 per month, this would put you in the 0–30% utilization rate. However, if you accept a credit limit increase to $2,000, let’s say, and your monthly spending remains pretty much the same, your utilization rate will now drop to 0–15%, which will help improve your credit score.
Next: Clear up any misconceptions you may have about credit cards
From thinking that interests are charged upon every credit card purchase and credit cards are monsters that should be avoided at all cost because they are debt machines, there are floating misconceptions about credit cards that are just not contributing to the proper basics of personal finance.
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