Question: Tim in Burlington: My 21-year-old just got her first credit card. I’m a little nervous because I got into debt when I was young and I don’t want it to happen to her. Besides paying bills on time, what advice do you have for her?
A: To your point, paying her bills on time will be key – especially since payment history is the biggest component of a FICO credit score (the most popular of the credit scores). And while FICO surprisingly doesn’t really care if someone makes payments in-full or carries a balance from month-to-month, we highly recommend she get into the habit now of paying off her full statement balance every month. Because as you may remember from your own experience, carrying a balance means paying interest charges – which can get expensive. Just consider this: Let’s say she happens to rack up $3,000 in debt (a fairly modest amount given the average American household has about $8,000 according to WalletHub). If her card has a 16% interest rate and she’s only putting $100 a month towards that balance, it will take just over three years to pay that off. Plus, she would pay almost $800 extra in interest!
Additionally, she shouldn’t get too close to her card’s credit limit. The typical advice is to use no more than 30% every month since using more can hurt a credit score (this means if she has, say, a $5,000 limit, she shouldn’t spend more than $1,500). However, ideally, we suggest she should try to stick closer to no more than 10% a month ($500 in this example).
We would also recommend she actually check her statement every month, for two reasons: One, it can give her a detailed look at her spending; and two, it’s an easy way to ensure there aren’t any suspicious charges. She should also turn on any security and fraud alert functionality.
Here’s The Simply Money Point: Credit cards often times get a bad rap. But in reality, they can be a great tool for building credit – especially for someone as young as your daughter – as long as they’re used responsibly. And we’ll tell your daughter the same thing we like to tell our Simply Money radio show listeners: She should strive to be a credit card issuer’s worst customer; because by paying bills in-full and on-time, the issuer isn’t making money off of her.