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Ideally, a credit card is a convenience. It allows you to avoid carrying cash and can buy you some time before you need to pay off your purchases.
A credit card can also help you manage your money, cover emergency expenses, build credit and earn rewards. But it could tempt you to buy on impulse, live above your means and land you in a cycle of fees and escalating penalty interest rates. Let's go over some of the best—and worst—ways to use a credit card.
The Best Ways to Use a Credit Card
Used responsibly, a credit card can help you manage your finances and improve your credit.
To Build Credit
There are a few ways you can use a credit card to build your credit:
- Become an authorized user. Becoming an authorized user means that a credit card holder has allowed you to make charges on their account. It's important that you and the primary user agree on whether you will actually use the card and, if so, how much you will spend. Authorized users are not responsible for paying credit card bills, but the card's payment history will be added to their credit reports.
- Get a secured credit card. Secured credit cards are cards that require a deposit, which is typically the same amount as the credit limit. They work just like traditional, unsecured credit cards, and some have a feature that allows you to "graduate" to an unsecured card after a certain number of on-time payments.
- Explore alternative credit cards. Some credit cards, such as the Petal® 1 "No Annual Fee" Visa® Credit Card (issued by WebBank, Member FDIC), rely on data other than credit scores to issue credit cards without a deposit. Interest rates may be higher, and they may have fees, but cards that consider alternative credit data can offer a good starting point.
To Finance New Purchases
If your refrigerator stops working and you need a new one on short notice, or you're faced with another financial emergency, a credit card can save the day. It pays to know the interest rates of your credit cards and how it will affect your costs. If you are going to need to carry a balance, you'll want to use the card with the lowest interest rate.
To Pay Off Debt
If you have a good or excellent credit score, you may qualify for a credit card with a 0% intro APR on purchases or balance transfers. Using the card to pay off other debt can potentially save you money on interest. Take a look at the math to be sure you are saving money, and make a plan to pay off the balance before the intro period ends and your interest rate goes up. It's also smart to know if this could affect your credit score. (A credit score simulator can help you make an educated guess.)
To Earn Rewards
If you pay off your credit card bill in full every month, you can maximize the value of your rewards. (You will also earn rewards if you carry a balance, but the interest you pay can outweigh your rewards.) If you play your cards right, you might be traveling for free or buying holiday gifts with points or cash back.
As a Safety Net
Plenty of unused credit means that you have a safety net if everything goes wrong at once—your car breaks down on your way to the airport, for example. The ability to put unexpected expenses on a card while you figure out how you are going to pay everything—whether transferring money from an emergency fund, temporarily putting less in savings or taking advantage of a 0% intro APR card—can give you some breathing room.
For Consumer Protections
If you used a credit card to buy an item that was never delivered or you received shoddy merchandise or service, you have recourse. You can request a chargeback, and the transaction will be investigated—and you will not have to pay the disputed amount while the investigation is underway.
To Save Time and Money
Check the fine print of your credit cards, and know what benefits may come with it. Some offer rental car insurance, price protection, fee-free foreign transactions, TSA Precheck and even concierge services.
To Budget or Track Spending
A credit card can help you figure out where your money is going—or where it went. Budgeting with a credit card isn't for everyone, and it will require regularly checking your spending online with an app. But if you are up to the challenge, it can help you maximize rewards and minimize interest. Another advantage of some cards: end-of-year expense tracking, by category.
The Worst Ways to Use a Credit Card
The worst way to use a credit card is on impulse purchases or to charge more than you can comfortably afford to pay back.
Maxing Out Your Credit Card
If you drive at speeds just below the speed limit, all is well. But if you charge up your credit card to just below the limit, that can be a problem. Those with the highest credit scores tend to use just a small portion of their credit limits.
It's not so terrible to splurge occasionally, but the size of the splurge matters, particularly if you are putting it on a credit card. An impulse purchase of a cruise at sea or a new couch is quite different from a small indulgence.
Spending Above Your Means
If you use credit cards to pay because you really cannot afford to pay your regular expenses otherwise, that's a problem. A certified credit counselor can help you figure out what the problem is and how to address it. The solution may involve trimming expenses, increasing earnings and learning how to budget.
How Using a Credit Card Affects Your Credit
Using a credit card can help your credit standing if you:
- Pay on time every time: Payment history is the most important factor in your credit scores.
- Keep balances low: Using only a small portion—experts suggest less than 30%—of your credit card limits helps keep your credit utilization low. Credit utilization is one of the most important factors in your credit scores.
Scoring factors that are also affected, but not as much, are:
- How long you have had credit: Keeping cards open, unless you have a good reason to close them, like excessive fees, can be useful.
- Credit mix, which indicates your record using different kinds of credit: Credit mix considers your experience with different types of credit accounts such as installment loans, credit cards, mortgages and retail cards.
A credit card can damage your credit score if you pay more than 30 days late or carry high balances, but you can minimize the chances that will happen by:
- Setting up alerts: You can do this with your card issuer to let you know when your balances exceed a level you set.
- Making an additional payment or payments: Making several payments during the same billing period can help you keep your credit utilization low, especially if you routinely charge more than 30% of your credit limit(s).
- Setting up autopay: Paying at least the minimum amount due on time every month prevents late fees and credit score harm that can result from late payments.
The Bottom Line
Credit cards are like most tools: In the right hands, they can make your life easier and more convenient—but they also have the potential to be misused. They can help you build credit, offer consumer protections you wouldn't otherwise have and more.
If you want to use credit cards for a specific goal, whether it's to get on the credit radar or to find a card with stellar rewards, Experian CreditMatchTM can help you find the card that best meets your needs.