Your ritual into adulthood usually kicks off by entering your first day in college. For most, getting their first credit card soon follows. While establishing credit early is important for your credit profile, there are some things to know about staying on the good side of credit debt.
Don’t Be That Guy
It can be tempting to use your credit card when out with friends to pick up the tab or pay for a friend’s concert ticket. Just remember that you are probably adding $20 in interest fees for that $100 bar tab. A couple of those and not only are you in a thousand dollars in actual money spent, but you now owe $200 more in interest fees. Living on a college budget isn’t likely going to allow you to repay your balances quickly, and you could end up in the minimum payment spiral.
There is a fine line between good credit debt and bad credit debt. Good credit debt is the type that works for you and gives your credit profile a boost. Bad credit debt can quickly drag down your score and flag you as a risk to other lenders, making it difficult to get additional credit in the future. The key to knowing how to stay on the good side is knowing exactly where the line is drawn between the good and the bad. This line is most often associated with having the right amount of debt, preferably 30% of the available limit or less. Balances that exceed 30-40% of your limit are typically seen as bad credit debt that will have a negative impact on your score.
Know When To Close Them
Many people think that closing an account with a paid off balance is helpful, when the opposite can be true. When you close an account because it has a zero balance you are also closing off the total available credit limit you carry, meaning your approved borrowing limit is reduced. If you have debt on other accounts closing a paid off account will lower your debt-to-credit limit, something that can damage your score. There is no harm in letting an account remain open with a paid off balance, and it can actually work in your favor. However, just be sure you aren’t tempted to use them for unnecessary spending.