A mid-February survey by US News & World Report reveals that more than two-thirds of respondents believe a personal finance course should be a requirement for high school graduation.
Adding to that number, another 26% say it should at least be offered as a high school elective. According to Next Gen Personal Finance, 21 states require at least some instruction in personal finance as part of their high school curriculum, but only 10 states require a semester-long personal finance class for graduation.
The survey also shows that most young adults do not get their first credit card under parental supervision. More than 56% of respondents got their first credit card on their own, either during college or after graduating from high school.
How much did you know about credit cards before using them?
When asked if they understood how credit worked when they first started using credit cards, 52% of respondents said yes.
But nearly a third say they “kind of” 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 carrying a balance increases their 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 carrying a credit card balance is one of the biggest myths about credit scores. Carrying a balance means you’ll 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 period, you basically get a short-term interest-free loan.
Pay your bill in full by the due date each month. Over time, you’ll build a great score and stay debt-free.
How to avoid the worst credit card mistakes
Although 11.4% of respondents say they haven’t made any major mistakes, the vast majority cite what went wrong when using credit.
Here are the top four credit card mistakes listed by respondents:
- Late payment of the invoice: 21.8%.
- Carry a high balance: 21.7%.
- Making only the minimum payment: 18.6%.
- Using too many credit cards: 12.4%.
Let’s take a look at each one and I’ll show you how to avoid making that mistake yourself.
Mistake No. 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 is when you miss a payment, the bigger the drop you’ll see.
Consider that timely payments are the most important rule for credit health. Pay all your bills on time and you’ll be setting the stage for a great credit rating. The second rule you must follow? Do not carry balance!
Mistake No. 2: Carrying a High Balance
We cover that you don’t need to have a balance to build your score. But there’s another reason why it’s important to pay attention to your balance amount.
You have a credit utilization ratio, which is the amount of credit you have used compared to the amount you have available. Your credit utilization is 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, then your utilization ratio is 50% (500/1,000 = 0.5). Too tall!
You want to have a balance no higher than 30%, and in this example, that means a balance less than $300 (300/1,000 = 0.3). However, to really increase your score, keep the ratio below 10%.
Mistake No. 3: Making Only the Minimum Payment
If you can only make the minimum payment, be sure to pay the bill before the due date. That’s the least you have to 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 are debt free.
Mistake No. 4: Using too many credit cards
I often see consumers apply for multiple cards (or other types of credit) in a short amount of time. There is a belief that increasing the amount of credit you have will help you get a great score even faster.
If you’re using credit responsibly, it’s certainly good 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 utilization rates low. If you end up with more credit than you can handle, you can make mistakes.
So, take a deep breath after you get approved for a credit card. Wait several months before requesting another. Focus on using your current card to develop good credit habits. Once you’ve mastered one card, you can think about adding another.