How to use a credit card the right way

Whether you’re looking to build credit, make a large purchase, or start earning airline miles for a future vacation, having a credit card can provide you with a number of opportunities, provided you use it responsibly.

It’s important to look at a credit card as a powerful financial tool. But with that power comes a certain degree of risk. Knowing how to responsibly use a credit card is key to making sure you’re building a good credit history and maintaining financial stability.

Unfortunately, many people use their credit cards in ways that can damage their financial wellbeing in the long term. In fact, the average American has over $5,500 in credit card debt¹.

Even if you already have a firm understanding of how credit cards work, it's vital to assess whether you can spend responsibly with it, as racking up significant credit card debt can have serious ramifications over time.

Here, we’ll discuss both the benefits and dangers of using credit cards, so you can ensure you’re taking the necessary steps to protect yourself financially when signing up for a new card. 

Why should I get a credit card?

A credit card is a line of credit, or borrowed money. You can use these funds to make purchases, provided you don’t go over the credit card’s limit, which is the maximum dollar amount you’re allowed to use the card for. 

It’s important to remember that when you make a purchase on credit, you’re using borrowed money, and that money must be paid back unless you want to accrue and pay significant interest. With that in mind, using your card (or cards) carefully is vital. If you don’t pay the money back on time, there can be severe consequences. 

One reason to get a credit card is to be able to build your credit and increase your credit score, which represents your trustworthiness when it comes to paying back your loans. 

Because personal credit is tracked and reported by professional credit reporting agencies, and used to determine if you qualify for larger loans like home mortgages, it’s always important to keep your credit in mind when using your credit card. 

Aside from building personal credit, credit cards offer some other advantages in the form of perks and rewards. These credit card perks and rewards vary widely. Common credit card perks include free travel insurance, free rental car insurance, and extended warranties on approved purchases. Common credit card rewards include cash back on purchases, frequent flier miles or access to airline lounges, and hotel loyalty points. 

What’s the wrong way to use a credit card?

Spending responsibly is vital when it comes to a credit card. Although It’s sometimes easy to get carried away using one, and it’s almost never a good idea to max out a credit card.

Every credit card comes with an Annual Percentage Rate (APR). The card’s APR is the interest that the credit card company charges you for borrowing money. 

Unless you pay off the entire balance on the credit card on time every month, the balance left on the card will draw interest and grow. And, with credit cards, APRs usually also include other annual fees.

You might be tempted to use a credit card for a big purchase, but you may want to look into personal loans first. That’s because personal loans generally offer lower APRs than credit cards, especially if you have good credit. That means you’ll probably have to pay less back to the lender than you would if you made the same purchase using a credit card. And, unlike credit cards, they come with the added benefit of a fixed interest rate and repayment terms. If you’ve already racked up debt using credit cards, personal loans can be used to consolidate that existing credit card debt. 

What are the risks of credit card debt?

Credit card APRs are typically between 10 and 30 percent, and that interest adds up fast. If you leave a balance on your card from month to month, that balance will draw interest, and you’ll have to pay the balance plus the interest back. 

Even though your credit card will have a spending limit, it’s important to not make purchases that you won’t be able to pay off in the future, especially when you factor in the interest you’ll be accruing if you don’t pay it off in full each month. And, if you have to continue using your card while attempting to pay off your balance plus interest, it can take years to finally make progress on your credit card debt. 

It’s very easy to build a lot of debt quickly, so if you’re worried about going into debt with a credit card, your best bet may be to stay away from them. 

How can a credit card damage my credit?

Overspending on a credit card, racking up significant debt, or missing payments can damage your credit in several ways. 

First, having too high a balance on your credit card will affect your credit utilization ratio, or the number that reflects how much of your total credit limit you’ve spent already. If you regularly carry a large balance on a card, you can keep your credit utilization ratio lower by making a payment twice a month instead of one large lump sum on your regular due date. Aim for a ratio below 10% of your total credit limit if you can.

Missed payments can also negatively affect your credit score, sometimes significantly if they happen repeatedly. Given that your payment history makes up a large percentage of your credit score, it’s important to make on-time payments. Consistent on-time payments boost your score, whereas late or missed payments are a red flag for lenders. 

Professional credit reporting agencies keep track of your debt, and if the debt grows too high, it may prevent you from taking out other loans. In some cases, unpaid credit card debt can result in legal action.

What’s the right way to use a credit card?

The first rule of using a credit card the right way is to only charge what you can repay, in full, every month. If you keep your credit card balance at zero from month to month, then you can effectively build your credit while taking advantage of the card’s rewards and perks. But, doing so is easier said than done. 

Although the credit card company will provide you a minimum balance that you have to pay every month, you should still pay off the full amount owed by the due date if you can. 

Even missing one credit card payment can affect your credit. That’s why it’s a good idea to set a monthly reminder to pay off the card, and some banks even allow you to set up automatic transfers to pay off credit card balances. 

How can I find the right credit card for me?

When shopping for a credit card, it’s helpful to plan ahead and ask yourself some basic questions. Why do you want the credit card? Are you trying to build credit? Do you want to build frequent flyer miles, bonuses, or rewards with your purchases? Do you want a low APR? 

Whatever the reason, make sure you apply for a credit card that aligns both with what you have in mind and your budget. Keep in mind that both your credit and your income will factor into which credit cards you can qualify for. Some cards require good credit and a higher income, so it’s a good idea to do your research first.

As we said before, a credit card can be a powerful financial tool when used the right way. Before applying for a credit card, take a hard look at whether you can use it responsibly and do your research in terms of what type of card, rewards, or perks fit your needs best. Always make on-time payments, in full whenever possible, and avoid spending outside of your means to ensure the credit card is working in your favor rather than creating unnecessary financial risk.