THE NO JOB LIFESTYLEHow a credit card works
A credit card lets you borrow from the issuer up to a set limit. Each purchase adds to your balance. Once a month the issuer closes a billing cycle and creates a statement showing what you owe, the minimum payment and the due date. Federal rules require the due date to be at least 21 days after the statement is sent, and that gap is known as the grace period.
If you pay the whole statement balance inside the grace period, new purchases generally carry no interest. If you pay less, interest applies to what remains and usually to new purchases as well, until you pay in full again. Cash advances work differently. They normally start charging interest right away and often add a fee, so we suggest leaving that feature alone.
Your first month, step by step
- Activate and sign in: create the online account and turn on payment alerts.
- Set up autopay: choose at least the minimum so a busy week never turns into a late mark. Many people pick the full statement balance if their bank account can cover it.
- Make small planned purchases: a phone bill or fuel is plenty. Treat the card like a debit card and only spend money you already have.
- Read the first statement: check every charge, the closing date and the due date.
- Pay on time: send the payment a few days early so processing delays cannot cause a problem.
How your card use affects your credit
Issuers usually report your balance to the credit bureaus around the statement closing date. That reported balance divided by your limit is your utilization. A $150 balance on a $500 limit is 30%. Amounts owed make up about 30% of a FICO score, and lower utilization generally looks better. You can pay part of the balance before the closing date if you want a smaller figure reported.
Payment history is about 35% of a FICO score. A payment normally is not reported as late until it is 30 days past due, but the issuer can still charge a late fee sooner. Once reported, a late payment can stay on your report for up to seven years. That is why autopay is the first thing we set up.
Mistakes worth avoiding
- Carrying a balance to build credit: this is a myth. Paying interest does not help your score.
- Paying only the minimum: the balance shrinks slowly and interest adds up. Your statement shows how long minimum payments would take.
- Applying for several cards at once: each application can add a hard inquiry.
- Closing your oldest card without thinking: closing reduces your total available credit, which can raise utilization.
- Ignoring unknown charges: report them quickly. Federal law limits liability for unauthorized credit card use to $50, and many issuers charge nothing.
Questions people ask
Should you pay the statement balance or the current balance?
Paying the statement balance by the due date is normally enough to avoid purchase interest. Paying the current balance also covers newer charges, which is fine if you want a lower balance.
How often should you use a credit card?
A small purchase every month or two keeps the account active. Some issuers close cards that sit unused for a long time, so read your terms.
Is it bad to use all of your credit limit?
Being near the limit raises utilization and can pull a score down while that balance is reported. The effect usually fades once a lower balance reports, but high balances also cost more in interest.