Our lovely, smart, and trustworthy babysitter recently told me she recently got her first credit card, which made me happy. She works hard, she studies hard, she is all around a responsible person.
Then came this whopper. I was shocked.
“I’m only paying some of the balance each month because I heard the fastest way to build credit is to carry a balance.”
“Whaaaaa?” I said. (And that’s a direct quote.)
“If you pay off 30% of your balance, it shows you’re credit worthy,” she said.
Then I set her straight.
“Oh no, dear. That 30% that is stuck in your head actually refers to what percentage of your total credit line you should charge – at the very most – each month. Since your credit line is $1,000, that means you should try not to charge more than $300 each month. It shows you are responsible because you’re not using your entire line of credit. Paying it off in full shows you are a good credit risk because you pay back everything you’ve borrowed.”
(My response was not quite that smooth, but I wanted to clean it up for y’all!)
This convo made me realize that if a gal as smart as our babysitter doesn’t know the ins and outs of credit, a lot of other folks might not either. I know my BargainBabe.com readers are especially savvy, and I’m not just trying to butter you up. But think of who in your life may need this blog post as a basic guide to using credit cards.
5 credit card facts you NEED everyone to know
- If you only pay the minimum, that $100 shopping spree may end up costing you $168. Yep, that’s right. You’ll end up paying 68% more. It’s hard to believe, I know, but I crunched the numbers here. Long story short, you had better pay off your entire balance in full every month on time or the Bargain Babe is going to track you down and give you a serious talking to!
- Credit card interest IS confusing. Luckily, Dacia boiled it down here. Read her post, and you’ll be an expert in no time.
- You only need two credit cards. One main one, and one as a back up that you charge small amounts on occasionally to keep it active. More than that, and you are probably dinging your score.
- Other types of credit build your credit history, too. Student loans, car payments, mortgage payments, and more all contribute. So you don’t have to have a credit card to build your credit history. All the cool kids may have one, but you’re cool just the way you are.
- Pay. Off. Your. Entire. Balance. In. Full. Every. Month. I know it’s not fun when someone tells you what to do, but trust me on this one. You will save so money in the long run if you avoid credit card debt. Here’s why: you’ll qualify for lower interest rates on your car loan, mortgage, and other loans you take out if you have a track record of paying your credit card balance in full. It shows you’re a good credit risk because you’ve paid back everything on time before. You’ll likely to honor the payments in the future. Look at this:
- The total cost of a $200,000 30-year mortgage at 4% is $343,739. Monthly payments are $955.
- The total cost of a $200,000 30-year mortgage at 7% is $479,018. Monthly payments are $1,331.
- You save $376 every month and $135,279 over the life of the 30-year mortgage. That’s a lot of money you’ll save if you create a good credit history.
TIP=> The 10 Never Break Rules of Good Credit