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How to Build Good Credit and Avoid Debt

If you have a mailbox, you've probably received many invitations to sign up for credit cards. While there are legitimate reasons to be cautious about taking on debt, you shouldn't automatically fear credit card offers.

Why? Because using credit wisely can be very helpful over the course of your lifetime. Credit cards can open opportunities that are otherwise unavailable to those who have not established a good credit history.

But before taking the plunge and filling out that next credit card application, consider these tips for building a healthy credit profile.

Know Your Debt–To–Income Ratio

  1. Begin by adding up all your monthly payments to your debts, including mortgage, student loan, car and credit card payments.
  2. Divide the sum of the monthly payments by your gross monthly income (gross monthly income is your total income before subtracting taxes, benefits, 401(k) contribution and other things). Then, multiply that number by 100. The resulting number is your Debt-to-Income, or DTI, ratio.

Generally, the lower your DTI ratio the more credit for which you’ll qualify. If you're looking at a major purchase in the future — such as a house — it's important to try to maintain a DTI lower than about 40% in order to receive a favorable credit score.

Be Disciplined with Credit Cards

Credit cards offer some really great advantages, such as the ability to make large purchases and earn rewards. However, it's also very easy to get carried away and rack up large debt.

Be sure to have a strategy. An effective spending strategy should include a regular payment schedule – always more than the required minimum. Also, only use the card to purchase items within your price range. Smaller, less expensive items are easier to pay off quickly, helping you to build good credit.

Be careful not to acquire too many credit cards at one time. Not only are they difficult to manage, but they can also quickly lower your credit score.

Know All of the Fees

Credit cards that offer special incentives may seem like great deals, but there are often hidden fees. It's important to keep track of all fees associated with a card and to contest them when necessary. This includes interest rates as well. Cards frequently experience a shift in interest rates depending on the situation, but these can sometimes be negotiated with the card companies.

Reward cards offer enticing bonuses (airline points, gas discounts, retail perks) but they can also carry higher interest rates and fees. Make sure to shop around and find a credit card with low interest rates, reasonable spending limits, and no annual fees.

It's best to meet with a banker who can explain your credit card choices in detail and how each fits your individual needs.

First Citizens Bank has the expertise and experience to help with all of your credit needs. For more information on how First Citizens can help you call 1.888.FC DIRECT (1.888.323.4732) daily between 7:00 a.m. and 11:00 p.m. Eastern time.

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