Establishing credit - how?

I recently opened a new checking account with a new bank. Their student checking program provides free overdraft protection in the form of a credit card. This is the first time I’ve had a credit card.

I know nothing about money, basically - my knowledge thus far consists of “get paycheck, deposit in bank, and don’t let the balance drop below $50.” (My own limit, not the banks). I know I do have several sizeable student loans in my name, which I’m gradually becoming more involved in managing, but thus far, my parents have mostly dealt with that. I’m assuming that that means I have some sort of credit rating, but I have no idea if A) that’s true, and B) whether or not that’s a good thing.

My question, in short: would it be a good idea for me to take this new credit card, make a few small purchases (i.e., 20 bucks or something), pay the bill in full at the end of the month, and not use it again unless needed? I’m assuming that you can fairly simply get a good credit rating by paying your bills on time and not, say, ditching out on any loans you may have. At this point, I’d really rather not have a credit card at all, as I understand the temptation of spending more money than you actually have. On the other hand, I’m trying to start to establish myself as financially independent from my parents. Am I going about this the right way?

Yes, perfect.

I use it to buy stuff I was going to pay cash for anyway - gas and groceries, mainly. You DO need to use it to establish that credit so don’t just put it away and forget about it.

Are you living on your own or do you have, say, your own cell phone bill? If you have a high enough limit, putting your utilities on the card is also good because you were going to cut a check for them anyway. You’re just going to cut a single check instead, and use the card as an intermediary while establishing your credit.

Just be smart about it, it’s not as scary as it seems.

Three good websites:

Consumer Federation of America
Article from bankrate.com. Good advice. Also basics of credit cards and scores
Free Annual Credit Report. You don’t get your scores, but you can see your payment history and all open credit accounts. Check it every year, from all three companies.

Having a credit card is a good thing. Don’t ever charge more than 50% of the credit limit, but do use it. I have an Amazon Visa card that gives me a $25 Amazon gift certificate after I earn enough points. I only use it for gas (about $30/month) and pay it off monthly.

Credit cards are more secure than checks or debit cards for purchases, because you have 60 days to dispute a charge, and if the vendor doesn’t work with you, they don’t get the money.

It’s easier to keep your money than to get it back later.

Educate yourself, don’t think of it as “free money” and always pay your bills a few days early. You’ll do fine.

Preferably, get a card that you’d like to have and use for a long time. One of the things that is looked at is not only credit limit and credit history, but also length of time using one card (the age of the tradeline). One of the things I wish I had done was get a card in college and keep it in good status rather than jumping from card to card.

If you don’t get a good deal (low interest, no annual fees or hidden charges) with a card, but that’s the best you can get, you can negotiate once you have a good credit history with them. For example, call up after six months and negotiate a lower fee or higher credit limit. Lower fees don’t help your credit directly, but it’s unwise to spend money on annual fees if you don’t have to.

Your bank may offer credit cards to customers. Keep in mind that a debit card won’t help your credit history, it needs to be a card with a credit line.

Pay on time. Pay early. For credit purposes, you don’t need to pay it all off every month, but you’ll want all or most of it paid off if you apply for new credit (like a car loan or a different card) to decrease your utilization. However, it’s a good habit to pay it off, because interest rates on credit cards are dreadfully high, and you want to avoid carrying balances that you can’t afford to fully pay off anyway. Otherwise, it’s very easy to fall into the trap of too much credit card debt. Never just make minimum payments.

I’m living in a dorm, so no rent/utilities or anything. I’m on my parents cell plan for now (they figure that if they pay for it, I’ll feel more obligated to call them once in a while.) I will probably use it for online purchases rather than just using a debit card or PayPal - I’m considering subscribing to NetFlix, so that would be a (small) monthly payment there.

My big fear is that I’ll end up spending too much. Using a debit card, I can just log into the bank’s website whenever and check my balance, and see exactly what I’ve spent, where, and how much I have left. AFAIK, there’s no such option with a credit card beyond the monthly bills.

Assuming I don’t end up charging way more than I can afford, using it more frequently will help to establish my credit more than using it once or twice, and then just leaving it for emergencies?

Depends on the card, but every card I’ve had for the last five years has allowed me to check my balance and purchases online. If you can check your bank balance online and the card is from the same bank, odds are you can check the credit card balance, too. Call the bank and inquire.

I would suggest picking up (with your new credit card?) Suze Orman’s “The Money Book for the Young, Fabulous, and Broke” because it offers good advice for young people that really don’t know anything about money.

I would say you seem to have some healthy respect for credit cards, but you shouldn’t be too scared of them.

Debit cards have zero online protection. They say they do, but it can take months to get your money back, and what are you supposed to do in the meantime?