Best Credit Card Practices

Credit cards can either be immensely beneficial to your financial health – or their debt can have long-lasting detrimental impact. The golden rule of having a credit card is to pay your bill in full and on time every month. But there are more ways to use credit cards to boost your credit score while scoring some other card-carrying perks. 

Understanding Credit Scores

Data provided by ValuePenguin.

There are five main components of a FICO® Score (the most commonly used credit score):

1. Payment History: The largest percentage of your score, your payment history is determined by how often your payments are on time. 
2. Amounts Owed: Thirty percent of your credit score comes from credit utilization, i.e. the ratio of your balance to your credit limit. Experts encourage keeping your credit utilization percentage under 30%. (For example: If you have a limit of $3,000 and a $1,500 balance, your credit utilization is 50%.) 
3. Length: How long you’ve held credit is taken into account, but it’s never too late to start! 
4. New Credit: This percentage speaks to the frequency in which you apply for loans or credit – and how much of that figure comes from newly opened lines of credit.
5. Credit Mix: Your credit mix is how many different types of credit you use (installing, revolving, and open credit). 

In the U.S., the average FICO® Score is 714 – up four points from 2020. Average FICO® Score by Generation:

Data provided by Experian.

Boost Your Credit Health 

Keep Your Balance Low

A low balance equals a higher credit score. Thirty percent of your credit score comes from credit utilization, i.e. the ratio of your balance to your credit limit. Experts encourage keeping your credit utilization percentage under 30%. (For example: If you have a limit of $3,000 and a $1,500 balance, your credit utilization is 50%.) 

Set Balance Alerts

Card issuers typically allow you to set up balance alerts, either by text, email, or in-app, to let you know when you’re about to hit your pre-set balance. If you’re not sure of what that number should be, set it to 30% or below of your limit to stick within that credit utilization window. 

Make Mid-Cycle Payments 

Nerdwallet.com encourages bi-weekly payments: “Making mid-cycle payments can also save you money on credit card interest. Interest, when you owe it, is calculated based on your average daily balance. Making payments early, or making extra payments each month, reduces that average daily balance and therefore the interest charged. Keep in mind, though, that if you never carry a balance from one month to the next, you don’t pay interest anyway.” 

Avoid Unexpected Fees

Read the fine print when it comes to late payment fees, over-the-limit fees, cash advances, and transferring balances. Credit card debt is notoriously both easy to accrue and difficult to get rid of. 

Take Advantage of the Perks

Airline miles, hotel rewards, cash back, points toward merchandise – credit card rewards are a great way to get more from your expenditures. Some credit cards even offer a sign-up bonus, but usually require a spending minimum within the first few months. Recognize what’s important to you – travel points, cash, or merchandise perks – to help you pick the right credit card for you. 

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Essential life skills aren’t typically taught in the classroom, but that doesn’t mean they’re not as critical as coursework. In our “Life Prerequisites” series (inspired by the Student Advisory Committee), we explore a range of topics, from understanding debt, minor home repairs, how to read a pay sub, managing a bank account, and more. If you have an idea for a future topic, please email us!