First credit card? Follow these best practices

By Erica Sandberg

Opening Credits

Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com. Ask a question. 'Opening Credits' stories

Dear Opening Credits,
I just got a credit card with a $500 credit limit. I'm new to credit and have a balance of $87.19. I just received my statement and now have to pay a $22 minimum payment. My question is should I pay the minimum or double my minimum to pay my balance in two months? What would you recommend? -- Jose 

Dear Jose,
Your letter perfectly exemplifies the problem that America has with credit education. It needs help, desperately. I am not disparaging you in any way -- just pointing out that even the basics need to be taught to every child and adult in this country. I respect that you're asking and not guessing.

The limit that you have is low, which makes sense. Without a proven credit history behind you, the issuing bank has no idea how you'll behave with the card. As you're probably aware, you can charge as much as you like as long as you don't exceed that maximum. As with all revolving debt instruments, the credit issuer gives you the option to pay the bill in its entirety or to pay a smaller amount and leave the rest to deal with later.

Ah, but what happens when you pay less? Interest will be added to the remainder, which increases the price of what you bought. So what is interest? For a credit card company, it's what they charge their cardholders to extend the loan past the finance-free grace period. The lower your interest rate or APR (annual percent rate), the less the debt you roll over from month to month will end up costing.

Therefore, assuming you do send just what the company is asking for instead of the entire $87.19, you would not just owe the $65.19 difference the following month, but that sum plus the assessed finance fees. The way interest is calculated is very important: It compounds, meaning that interest is added to the principal (the amount you charged) as well as to the finance charges that have already been added.

The best approach is to always pay the entire amount you charge by the due date. Because your debt is so small, however, chopping it into two installments won't hurt your wallet as the finance charges will be so low. Also, creditors charge a minimum dollar amount (in your case, $22) no matter what you owe. In your case, even if you just paid their smallest expected sum, you'd be in the clear in a few months and just pay a couple of extra dollars in interest. Then again, this is presuming that you don't keep charging and adding more to the balance. Do so and you'll be on the dreaded never-ending debt ride that millions of Americans are trapped on today.

So resist, Jose! Just because you can spend $500, that doesn't mean you should. Only slap that plastic down when you know for sure that you'll have enough money in your checking account to cover the entire bill. That's the best habit you can adopt.

Also, remember that all of your activity with that card is being watched. The company has already sent the date you opened the account to the consumer credit reporting bureaus: TransUnion, Experian and Equifax. Every month your creditor will report your actions to the bureaus, including what your high balance was and if you made payments on time or late. If you charge regularly, keep the balance at $0 and make all payments by the due date, your credit rating will rise and you will eventually be eligible for premium loans and lines of credit, as well as be more desirable to future landlords and employers.

Thanks for writing, Jose!

See related: FICO's 5 factors: The components of a FICO credit score

Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.

Send your question to Erica.

Published: February 15, 2012

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