A mid-February survey by US News & World Report found that more than two-thirds of respondents believe a personal finance course should be required to graduate from high school.
On top of that number, another 26% say it should at least be offered as a high school option. According to Next Generation Personal Finance21 states require at least some personal finance education as part of their high school curriculum, but only 10 states require a one-semester personal finance course for graduation.
The survey also shows that most young adults do not get their first credit card under the supervision of their parents. More than 56% of survey respondents got their first credit card on their own, either while in college or after graduating from high school.
What did you know about credit cards before using them?
When asked if they understood how credit worked when they started using credit cards, 52% of respondents said yes.
But nearly a third say they “somewhat” understood credit but didn’t fully understand, for example, the risk of carrying a balance. And 16% say they didn’t know how credit cards worked when they got their first card.
Credit is not intuitive, and people often don’t know how big the literacy gap really is. For example, the survey shows that 58% believe that having a balance increases your credit score.
Why you don’t need to carry a balance on credit cards
The idea that you can’t build a stellar score without having a credit card balance is one of the biggest myths about credit scores. Having a balance means you will pay compound interest on your purchases.
You can really create a great score for free. Most credit cards have a grace period, and if you pay off your balance in full during that time, you’re essentially getting a short-term, interest-free loan.
Pay your bill in full by the due date each month. Over time, you’ll develop a great score and avoid going into debt.
How to Avoid the Worst Credit Card Mistakes
Although 11.4% of survey respondents say they made no major mistakes, the vast majority cite what went wrong when using credit.
Here are the top four credit card errors listed by survey respondents:
- Paying the bill late: 21.8%.
- Having a high balance: 21.7%.
- Make only the minimum payment: 18.6%.
- Using too many credit cards: 12.4%.
Let’s take a look at each, and I’ll show you how to avoid making this mistake yourself.
Mistake #1: Paying your bill late
Payment history accounts for 35% of your FICO score. Nothing puts you in a credit hole like missing payments. And the higher your score when you miss a payment, the bigger the drop you’ll see.
Consider timely payments the most important rule of credit health. Pay all your bills on time and you’re setting the stage for a great credit score. The second rule you must follow? Don’t wear a balance!
Mistake #2: Having a high balance
We’ve covered that you don’t need to carry a balance to build your score. But there’s another reason why it’s important to pay attention to the amount of your balance.
You have a credit utilization ratio, which is the amount of credit you have used compared to the amount you have. Your credit usage makes up 30% of your credit score, so it’s right behind payment history. To avoid lowering your score, keep your ratio below 30%.
Here’s an example: If your credit limit is $1,000 and you have a balance of $500, your utilization rate is 50% (500/1,000 = 0.5). Way too high!
You want to have a balance of no more than 30%, and in this example, that means a balance of less than $300 (300/1,000 = 0.3). To really increase your score, keep the ratio below 10%.
Mistake #3: Only making the minimum payment
If you can’t make the minimum payment, make sure you pay the bill by the due date. This is the minimum you should do.
But if you only pay the monthly minimum on a regular basis, you will end up in debt. Compound interest makes your balance grow quickly. Stop using credit cards and focus on paying more than the minimum amount until you’ve exhausted your debts.
Mistake #4: Using too many credit cards
I often see consumers applying for multiple cards (or other types of credit) in a short period of time. There is a belief that increasing the amount of credit you have will help you build a good score even faster.
If you’re using credit responsibly, it’s definitely a good thing to have multiple types of accounts on your report, like credit card accounts and a mortgage or car loan. But the most important thing to do is pay your bills on time and keep your credit card usage low. If you end up with more credit than you can handle, it leads to mistakes.
So, take a deep breath after getting approved for a credit card. Wait several months before asking for another one. Focus on using your current card to build good credit habits. Once you’ve mastered a card, you can think about adding another.