Credit cards are a major part of our lives. They can help you build credit, earn rewards, and offer fraud protection. They are more convenient than cash but can lead to debt if not used properly.
Here is how you can get the most out of your credit card and what you need to steer clear of.
How to Use a Credit Card
Spend Within Your Means
The golden rule is to treat your credit card like a debit card. Only charge what you can afford to pay off in full every month. If you don’t have the cash in the bank to pay for the item, don’t buy it on credit.
Pay Your Bill on Time
The best thing you can do for your credit score and wallet is to pay your bill on time every month.
If you miss a due date, you’ll be hit with a late fee and a higher interest rate. Your credit card provider will also report the missed payment to the credit bureaus, dropping your score by 100 points or more.
Set up autopay or reminders so you never miss a due date. Many credit card issuers will happily send you reminders.
Maintain a Low Utilization Ratio
Keep your spending below 30% of your credit limit. If you have a $500 credit card limit with no deposit, that means keeping your balance below $150.
A high balance signals financial stress to lenders and can hurt your credit score. Low utilization, on the other hand, shows that you’re managing credit responsibly.
Read Over Your Monthly Statements
Don’t ignore your monthly credit card statements. Reviewing them helps you spot errors, unexpected fees, or unauthorized charges. If you see fraud, report it immediately.
Reviewing your statements also helps you track your spending.
Know Your Credit Card’s Terms
Note the APR, potential fees, and billing cycle to avoid interest charges and fees. Pay attention to the payment due date and the grace period. The grace period is typically 15 to 20 days after the statement closing date. During this time, you can pay your bill without accruing interest.
Take Advantage of Rewards
Find a credit card that gives rewards in categories where you spend the most. If you travel a lot, look for a travel card with points or miles. Cash-back cards for groceries or gas can be perfect for everyday spending.
Don’t overspend in pursuit of rewards. If you pay interest, you’ll negate any benefit the rewards give.
Increase Your Credit Limit Each Year
Credit limits are not set in stone. You can always request an increase. Credit card providers will raise limits if your score has improved or you have a higher-paying job. They may conduct a hard inquiry before approving a request.
The higher your limit, the easier it is to achieve a low utilization ratio. Just be sure not to let a higher limit tempt you into overspending.
What You Need to Avoid
Don’t Get Close to Your Limit
Your credit limit is the maximum amount you can borrow. It is not something you should aim for.
Maxing out your credit card or even getting close to your limit can damage your credit score. A high balance, even temporarily, raises your utilization ratio and lowers your score. A high utilization rate tells lenders you’re overextended financially and may be unable to pay bills.
Never Spend More Than You Have
It may be tempting to stretch your spending with credit, but that’s a dangerous habit. Only charge what you can afford to pay off in full. If the money isn’t in your bank account, don’t swipe.
Don’t Pay the Minimum
When you pay the minimum, you’ll keep your account in good standing, but you’ll carry a balance. Carrying a balance means you’ll pay interest, sometimes a lot.
Even if your balance seems small, interest charges can pile up and become unmanageable. For example, say you have a $2,000 balance and a 21% APR. If you only pay the minimum, it would take you over 42 years to pay off the debt. You’d end up paying approximately $9,797.94 in interest alone. That’s nearly five times the original amount borrowed.
Paying the minimum barely makes a dent in your balance and can keep you in debt for years.
Never Use Credit as a Substitute for Income
Don’t use credit for things you don’t have cash for. Relying on credit for your rent, groceries, or utilities will only make the problem worse. It’ll quickly lead to long-term debt. In this case, you need to find ways to increase your cash flow.
Think Carefully About Closing Old Accounts
Older accounts help your credit score by showing a longer credit history. Canceling cards will shorten the average age of your accounts and can hurt your score.
Closing an old account will also reduce your available credit and increase your utilization ratio.
Try to keep old accounts open. There are exceptions to the rule. If your card has high fees or tempts you to overspend, it can be worth the credit hit to close it.
Avoid Cash Advances
Credit card cash advances are a costly way to borrow. You’ll have to pay a fee of 3% to 5% of the amount withdrawn and an ATM fee. Plus, you’ll be hit with a higher-than-normal interest rate that applies immediately; there’s no grace period. Nine times out of ten, credit card cash advances are not worth it.
Don’t Apply for Multiple Cards at Once
When you apply for a new credit card, the provider will conduct a hard inquiry. Each inquiry drops your credit score by five to ten points. Multiple hard inquiries in a short time will hurt your score. It also sends up red flags to lenders that you’re desperate for credit.
Instead, research the card you want and get pre-approval before applying. Preapproved does not guarantee you’ll get the car,d but lets you know you meet the basic criteria.
Stagger applications by at least six months. Focus on managing one card well before opening another.
Tips for Using a Card to Build Credit
Credit cards are the easiest way to build credit, but you must use them responsibly.
- Make small purchases and pay them fully to show a positive payment history.
- Pay your bill throughout the month to keep your utilization below 30%.
- Track your spending so that you don’t accidentally exceed your budget.
Over time, responsible use can lead to better credit scores.
Final Thoughts
When you’re disciplined with your spending, credit cards can be a good way to raise your credit score and earn rewards. Misuse your card, and your score will suffer. Worse yet, you can end up in debt.
Create a budget and spend your means. Over time, your score will grow, and you can rack up the rewards.