A mid-February survey from US News & World Report reveals that over two-thirds of respondents believe that a personal finance course should be a requirement to graduate from high school.
On top of 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 personal finance instruction 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 don’t get their first credit card under parental guidance. Over 56% of survey respondents got their first credit card on their own either during college or after they graduated from high school.
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How Much Did You Know About Credit Cards Before Using Them?
Asked if they understood how credit worked when they began using credit cards, 52% of respondents say yes.
But almost a third say they “sort of” understood credit but didn’t totally 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 isn’t intuitive, and often people don’t know how big the literacy gap actually is. For instance, the survey shows that 58% believe that carrying a balance builds 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 carrying a credit card balance is one of the biggest myths about credit scores. Carrying a balance means you’re going to be paying compound interest on your purchases.
You really can build a great score for free. Most credit cards have a grace period, and if you pay your full balance during that period, you’re basically getting a short-term no-interest loan.
Pay your bill in full by the due date every month. Over time, you’ll develop a great score, and you’ll stay out of debt.
How to Avoid the Worst Credit Card Mistakes
Although 11.4% of survey respondents say they haven’t made a major mistake, the vast majority cite what went wrong when using credit.
Here are the top four credit card mistakes listed by survey respondents:
- Paying the bill late: 21.8%.
- Carrying 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 makes up 35% of your FICO score. Nothing puts you in a credit hole quite like missing payments. And the higher your score when you miss a payment, the bigger the drop you’ll see.
Consider timely payments to be the most important rule for credit health. Pay all of your bills on time and you’re setting the stage for a great credit score. The second rule you must follow? Don’t carry a balance!
Mistake No. 2: Carrying a High Balance
We cover that you don’t need to carry a balance to build your score. But there’s another reason why paying attention to the amount of your balance is important.
You have a credit utilization ratio, which is the amount of credit you’ve used compared with the amount you have available. Your credit utilization is 30% of your credit score, so it’s right behind payment history. To avoid decreasing your score, keep your ratio under 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). Way too high!
You want to have a balance no higher than 30%, and in this example, that means a balance under $300 (300/1,000 = 0.3). To really increase your score, though, keep the ratio under 10%.
Mistake No. 3: Making Only the Minimum Payment
If you can only make the minimum payment, be sure you pay the bill by the due date. That’s the minimum you need to do.
But if you only pay the monthly minimum on a regular basis, you’ll 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’re out of debt.
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’s a belief that increasing the amount of credit you have will help you build a great score even faster.
If you’re using credit responsibly, it’s certainly a good thing to have multiple types of accounts on your report, such as credit card accounts and a mortgage or an auto loan. But the most important thing to do is to pay your bills on time and keep low utilization ratios on your credit cards. If you end up with more credit than you can handle, it leads to mistakes.
So, take a deep breath after you get approved for a credit card. Wait several months before you apply for another one. Focus on using your current card to develop good credit habits. Once you’ve mastered one card, you can think about adding another one.