How to Use Your Credit Card the Right Way

Point of Interest

Credit cards aren’t just a convenient way to make purchases without the hassle of cash. The cards can help you improve your credit scores as well as receive better interest rates, pay lower finance charges and be more likely to get approved for loans and credit cards.

Credit cards are an essential weapon in your financial arsenal and it’s vital to learn how to use a credit card properly. Credit cards can provide you with lucrative rewards and offer a way to finance purchases over time instead of all upfront.

However, credit cards are also a double-edged sword that can cause serious problems for your financial future if used improperly. It’s important to know how to use a credit card the right way so you don’t end up with an insurmountable debt load and low credit scores.

Benefits of using a card responsibly

Using a credit card allows responsible users to build credit with on-time payments. If you pay your entire balance each month, you can lower your credit utilization ratio, a heavily weighted factor in credit scoring models. Plus, paying your entire balance means you won’t be assessed interest on the balance you carry over, saving you money.

Not to mention, there are plenty of lucrative rewards credit cards. You can speed up the timeline to your next vacation with travel rewards, get deep discounts at your favorite retailer with a store credit card or opt for statement credit with a cash back card. Rewards credit cards can help you strategize your expenses, so you can save money and earn points or miles you can redeem outright or through a rewards portal.

Consequences of using a card recklessly

On the other hand, credit cards make it incredibly easy to accrue debt. Recent numbers from the New York Fed show national credit card debt sits at around $848 billion. Unlike a debit card which depletes funds immediately from your bank account, a credit card allows you to pay for purchases in full at a later date. Unfortunately, if you keep a high-revolving balance on your card, interest fees and penalty charges can make the balance difficult to pay off.

In addition, many otherwise responsible cardholders sometimes get pulled into spending more than they would because of tempting introductory offers. For example, a card may offer a cash back bonus for spending a certain amount of money in a set timeframe after account activation. The welcome offer may tempt a user to spend an abnormal amount to obtain the bonus. This debt can end up costing a cardholder more in interest payments than the bonus was ever worth, which makes responsible credit card use extremely important for avoiding financial pitfalls.

How does a credit card work?

Credit cards work as a credit line. You can draw from your credit line up to the credit limit each month. At the end of the month, you pay your credit card bill. If you don’t pay your total balance, the remaining amount is carried over to the next month with interest, which you will have to pay.

Understanding payment terms

It’s imperative to read the payment terms of your credit card, so you understand when your bill is due and the consequences for actions like going over your credit limit or being late on your payments. Knowing how much fees you’ll pay in balance transfers and foreign transactions can help you ease any undue financial obligations associated with credit cards.

Building credit

The payments you make on your credit card are reported to all three credit agencies. Over time, these on-time payments (alongside other good financial behavior) can help you improve your credit score. In turn, this can boost your creditworthiness, which sums up your risk as a borrower. Your creditworthiness determines things like your interest rates, your credit limit and whether or not you’ll be approved for a loan or credit card. It’s in your best interest to use your credit card wisely to build credit.

Earning rewards

If you have a rewards card, you’ll likely need to track your points and in some cases, redeem them for your rewards or activate certain spending categories. Many rewards cards allow you to earn points or miles for all or certain purchases at a set earning rate. If you prefer more straightforward rewards, you can also invest in a simpler option like a flat-rate cash back card which automatically applies your cash back as a statement credit.

When you choose a credit card, it’s important to pick one reflecting your lifestyle, spending habits and overall financial goals.

Monitoring and tracking your spending

Many credit card issuers offer their own apps, making it easy to track and monitor your spending. It’s essential to review your statement each month to double-check your charges and dispute any errors. While paying off your monthly bill in full is recommended, by closely tracking your spending, you’ll know how much money you’ll need to cover the credit card purchases.

Fraud and security

Credit card users are protected by the Fair Credit Billing Act (FCBA), so you won’t be responsible for paying unauthorized charges. The most you can be liable for is $50, but most credit card issuers won’t charge you at all. Once an unauthorized charge is verified, the amount in question will be credited back to your account.

In addition to federal protection, plenty of credit card companies also offer robust security measures of their own. Travel and car rental insurance, purchase protection and credit monitoring are just a few of the security features credit card issuers may offer their members.

What to do when you can’t meet your payment

If you can’t make your credit card payment, your best bet is immediately contacting your credit card issuer. Most financial situations are negotiable in life, including the terms of your credit card. You’ll be in a better position to negotiate if you’re a longtime customer with a history of responsible payment behavior. Credit card issuers can forgive late payments, lower interest rates and lower your minimum payments — you just need to ask.

Many credit card issuers also offer hardship plans to help cardholders who are coping with the sudden loss of a job or illness. Again, it’s important to reach out to your credit card issuer via their customer service line to inquire about your options.

The bottom line

Credit cards are a useful financial tool, but the cards can also create a debt nightmare if you’re not careful. However, with responsible payment behavior and careful usage, you can lay the foundation for a strong financial future.

Michelle Wilson

Contributing Writer

Michelle Wilson is a San Diego-based writer specializing in unraveling the mysteries of personal finance and technology.