How to Use a Credit Card the Right Way

How to Use Credit Cards: The Basics

Credit cards can seem simple on the surface, but understanding how they truly work is the first step to responsible use.

The Pros and Cons of Credit

Yes, credit cards have their issues, but they’re not all bad. It’s important to weigh the pros and cons to keep your finances in check.

Pros	Cons
You can buy needed items & cover emergency expenses	You pay more for purchases with interest added
It’s more convenient than writing checks and safer than carrying cash	Additional fees may also apply to your transactions
It creates a record of your purchases	If you lose track of spending, you can face financial distress
Credit cards offer stronger fraud protection than debit cards for online purchases.	There is a proven increase in the risk of buying on impulse
Some cards offer rewards with great incentives	“Purchase acceleration” can make you buy more just to earn rewards
On-time credit card payments builds positive credit history	Missed payments and high credit use harm your credit score

How to Use a Credit Card Step-by-Step

Step 1: Apply and get approved

First, choose the credit card you want and apply for it. Credit approval usually depends on your credit score. If your credit is limited, a secured credit card (requiring a deposit) is an option. Once you’re approved, you’ll receive a credit limit (the maximum you can borrow) and an assigned interest rate.

Step 2: Activate your card

Once you receive your card, you must activate it before you can use it. This is usually done by calling a toll-free number or activating it online.

Step 3: Make purchases

Once your card is activated, you can begin making purchases with it in person (card present) or online (card not present). When making purchases make sure you are not charging more than you can reasonably pay off. 

Step 4: Understand your bill

Each month, you’ll receive a bill (20-30 days before the due date) showing the following information: 

• Billing period & due date: Dates the bill covers and when payment is due.
• Minimum payment & new balance: The least you must pay and the total you owe.
• Transactions & Interest: A list of purchases, payments, and interest charges.
• Fees & APR: Any fees applied and the interest rate on your account.
• Available credit: How much credit you have left.
• Payoff information: Information on how long it will take, and how much it will cost, to pay off your balance.

Step 5: Pay you bill

Pay at least the minimum payment amount by the due date to avoid late fees. Paying more is highly recommended. 

If you don’t pay the bill by the due date, penalties start to apply:

• Late fees apply immediately once you miss the due date.
• The credit card company will report the payment as missed if you are more than 30 days late. This will negatively im
• If you miss a payment by more than 60 days, the creditor will apply a penalty APR.

Learn the 30 dos and don’ts for using credit cards »

Understanding interest rate grace periods

A credit card grace period is a period to avoid paying interest. If you begin your billing cycle with a zero balance and make purchases, you have a period to pay off that balance in full. If you do so by the due date, no interest is charged. However, if you start with a balance, the grace period generally doesn’t apply, and new purchases accrue interest immediately. To maximize rewards and avoid interest, pay your balance in full each month.

Understanding fees

Credit card issuers charge 5 common types of fees:

• Annual fees
• Balance transfer fees
• Cash advance fees
• Foreign transaction fees
• Late fees

All of these extra charges are avoidable. Make sure you read the terms of agreement before opening a new card. You want to be aware of all of the possible fees associated with the account before it’s too late. Additionally, keep up with your payments to avoid the most common of the 5: late fees.

Strategic credit card use

Credit cards can be valuable tools for building credit and earning rewards, but it’s important to use them strategically. Think of them as a tool, not a source of extra funds.

Always pay on time

Paying at least the minimum payment on time every month is essential for avoiding late fees and credit score damage. Missing your credit card’s due date results in immediate late fees. After 30 days, the missed payment is reported to credit bureaus, negatively affecting your credit score. If the payment remains unpaid for 60 days, a penalty APR is applied, significantly raising your interest rate and increasing your debt. This prolonged delinquency further damages your credit, potentially limiting future borrowing opportunities.

Pay more than the minimum payment

Most common credit cards don’t require you to pay off the full balance every month. Instead, they require a monthly minimum payment. This amount changes depending on your creditworthiness, your credit limit, and your current balance.

However, minimum payments can keep you in a cycle of debt. If you only pay the minimum payment, the leftover balance starts accruing interest. This makes it easy to start racking up more and more credit card debt.

By paying more than the minimum, you reduce the amount of interest you’ll pay and save money. Ideally, consistently paying your balance in full is the best way to avoid interest and maintain financial control.

Budget and plan your purchases

Create a monthly budget and only use credit cards for planned purchases. This helps prevent impulse spending and debt. Budgeting apps or spreadsheets can help you stay within your budget and achieve your financial goals.

Ask these questions before making a purchase

Before using your credit card, ask:

• What benefit am I getting from this purchase? (Rewards, protection)
• Can I pay this off by the due date?
  • If not, how much more is that purchase going to cost with interest added before I pay it off? 
• Would I still buy this if I didn’t have a credit card?

Monitor your spending

Review your credit card statements regularly and track your spending and identify any unauthorized transactions. If you spot any it could be a sign of identity theft. 

Know when to stop charging

You should always aim to use less than 30% of your credit limit (the less you use, the better). Exceeding 30% of your credit limit negatively impacts your credit score due to an increased credit utilization ratio. To calculate your ratio, divide your total credit card balances by your total credit limits.

Negotiate lower interest rates

Call your credit card companies periodically to negotiate lower interest rates, particularly if your credit score has improved since you opened the account and if you consistently make on time payments. 

Make the most of rewards

Credit cards often offer valuable rewards, which can be a great way to maximize your spending. To get the most out of these rewards, choose a card that matches your spending patterns, whether it’s cashback or travel points. Use these rewards to reduce the cost of essential purchases, freeing up money for other budget areas or saving for future travel. However, rewards are only valuable if you avoid interest.

Carrying a balance negates rewards. For instance, 5% cash back on $300 ($15) is lost to interest within months if you only pay the minimum. This principle extends to all rewards cards, including travel points.

To truly benefit, consistently pay your balance in full each month.

Common credit card mistakes to avoid

Using credit cards for unplanned purchases

Impulse buys are a major culprit in credit card debt. When you see something you want, the ease of swiping can override sound judgment. However, unplanned purchases often strain your budget and lead to a balance you can’t pay off. Instead, create a shopping list and stick to it. If you see something you want that isn’t on the list, give yourself a cooling-off period before making the purchase.

Using high APR cards for large purchases you cannot pay off quickly

If you charge big purchases to high APR credit cards and can’t pay them off fast, expect rapid interest growth. This creates a debt cycle, cancels out any rewards, and harms your credit. It also causes financial stress and diverts money from your goals. Before doing this, look into lower-interest options or save, as high APR debt significantly inflates the total cost.

Relying on credit cards for essential expenses

Consistently using credit cards to cover basic needs like groceries, rent, or utilities is a sign of financial trouble. This indicates that your income is not meeting your essential expenses. Instead of relying on credit, assess your budget, identify areas where you can cut back, and explore ways to increase your income.

Using cash advances 

Cash advances might seem like a quick fix, but they come with significant costs. Credit card companies charge high fees for cash advances, and interest accrues immediately, often at a higher rate than regular purchases. This makes cash advances an extremely expensive way to borrow money. Explore alternative options like personal loans or borrowing from friends or family.

Overspending

Credit cards make spending convenient, but this can lead to impulsive purchases and buying things you can’t afford. Before making a purchase, especially one you didn’t plan, take a moment to consider if you truly need it and if it fits your budget. Practicing mindful spending and delaying immediate gratification can help you avoid unnecessary debt. Instead of buying something right away, try setting a savings goal and waiting until you have the money.

Relying on credit cards for emergencies

While credit cards can be a safety net, they shouldn’t be your only line of defense. Relying solely on credit for emergencies can quickly lead to accumulating high-interest debt, creating a cycle that’s difficult to break. Instead, build an emergency fund so you don’t have to rely on credit. Aim to save three to six months’ worth of living expenses in a readily accessible account.

Choosing the Credit Cards for Your Needs

Not all credit cards are created equal. Understanding the different types of cards available can help you decide on the best card for you.

Traditional general-purpose credit cards

These are the most basic type of unsecured credit line available. You can purchase items up to a set credit limit. The credit card company applies a standard interest rate based on your credit score.

Reward / point reward credit cards

These give you something back for making purchases, such as points to redeem for things like airline travel, groceries, and special events. You earn points for purchases and once you reach a certain level of points, you can exchange them. These credit cards always have higher interest rates than traditional cards!

Cash back credit cards

These give you a percentage of cash back for some or all of the purchases you make. You typically receive the money in a lump sum at the end of the year. Like rewards cards, these cards have higher interest rates.

Secured credit cards

You can use these cards to build credit if you have bad credit or no credit. Simply put down a deposit with a creditor. The amount you put down (minus fees) will become your credit limit. You pay your bill as you would with any other credit card. However, if you fail to pay, the creditor can take your deposit.

Store credit cards 

These are cards issued by a specific store. Retailers offer points and reward programs to store card users. These cards are usually easier to get with bad credit or no credit. Just be sure to read the terms carefully. Store cards tend to have higher rates and restrictive terms. For instance, some cards have deferred interest, which can lead to big bills and challenges down the road.

Important Factors for Comparing Cards

When you decide to get a new credit card, make sure you consider the following factors when comparing different credit cards you’re thinking of applying to use:

• Annual percentage rate (APR): Cards can have different APR for different types of transactions. Some cards also offer an introductory APR that only applies for a certain time. Also note the penalty APR that may be applied if you pay late, miss a payment or go over your credit limit.
• Fees / Finance charges: These include account setup and maintenance fees, charges for additional cards, as well as fees for various types of transactions.
• Payment schedule: Credit cards get paid back according to a set payment schedule that may differ from one card to the next. Some cards even require the balance to be paid-in-full every month. Know how payments are set so you can factor the payments into your budget.
• Terms for rewards/cash back incentives: Don’t just assume cards with rewards or cash back are better than traditional cards. The incentives may not be worth the extra cost in interest and fees. Do some calculations to make sure you wouldn’t be better off purchasing a reward in cash and using a traditional credit card with a lower interest rate.

Staying Up-to-Date on Your Terms

Thanks to new credit laws, major changes to your terms and conditions require 30 days notice prior to the change going into effect. The following list outlines the changes a credit card company must inform you about at least 30 days prior to it taking effect:

• A change in your credit limit
• An extension of your grace period
• A decrease in any charge, not related to a change in interest rate
• A change to any optional service on that account
• Any change in your interest rate as a result of a change in the reference rate

That last point can be confusing. This doesn’t mean a creditor calls to tell you when penalty APR has been applied to your account. They are only required to tell you if your APR changes because the reference rate used to calculate it changes; the reference rate is the base interest rate used to calculate APR.

Most credit cards follow the Federal Funds Rate from the Federal Reserve. This is the benchmark interest rate that determines the cost of borrowing for most consumer credit. When the economy is weak, the Fed lowers their rate to encourage people to borrow. This helps kickstart the economy. But when the economy is strong, the Fed raises the federal funds rate to combat inflation. This means using credit cards in a strong economy and carrying credit card debt is more expensive.

Outside of that situation, you may be surprised to look at a bill and see a different APR when didn’t know a new rate would be applied. If more than one rate is listed in your contract, it’s your responsibility to know when and how different rates apply.

Final thoughts: Credit card mastery

By using the above information to build your credit usage strategy, you can begin to use your cards in a strategic way that supports your financial stability instead of putting it at risk. Still, you may have some questions about how to use credit to your best advantage.

The following questions are four key topics you need to know if you really want to achieve mastery over your credit cards and the debt they generate:

• How do I choose the right credit cards for me?
  In this section, we help you select your credit cards strategically so you can have accounts that help you achieve your financial goals and avoid problems with debt.
• How many credit cards do I need?
  You may not know it, but having a low number of credit cards can actually make it harder to achieve the credit score you want. Learn how many accounts you need to have open in order to maximize your credit score.
• How much credit card debt is too much?
  Having no credit card debt is ideal for financial stability, but if you really want to maximize your credit score, you shouldn’t actually maintain zero balances on all of your accounts. We help you find the sweet spot when it comes to credit card debt.