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Using a credit card to make purchases has many perks, from providing great rewards and other benefits to helping you build a strong credit profile. The key to getting the most from your credit cards is managing them with care. To use a credit card responsibly, you'll need to commit to making all your payments on time and being aware of how your daily decisions can impact your accounts. Credit cards can end up costing you far more than they're worth if you're not careful—but they can also be fantastic for your financial health if you know what to do.
Here are the essentials for using your credit card to maximize benefits, eliminate debt and build good credit.
1. Always Pay on Time
Payment history influences your credit score more than any other factor. On top of the late fees and other penalties you might face, a late credit payment neglected for just a single billing cycle (about 30 days) could result in a negative report sent to credit bureaus that will stay on your record for the next seven years.
Simplify your monthly payments as much as possible to eliminate errors of both memory and money: Set phone and calendar reminders for your due dates, or schedule one day a month to pay all your bills in one sitting. Even better: Set up automatic payments so you know at least your minimum amount due is paid on time (you can easily add extra payments during the month or set your autopay for a higher amount). Your goal is to make paying bills a relatively stress-free, organized routine; that way, payments can factor neatly into a monthly budget and won't be accidentally overlooked.
Luckily, you can still protect your credit score from payment mishaps if you react quickly. As soon as you realize a credit card payment is overdue, pay it immediately. If you do so before your next billing cycle closes, your credit won't be affected—but you could still be on the hook for late fees or penalty APRs. Contact your credit card company to find out if they can forgive any penalties and fees. And if you're having difficulty making on-time payments on a regular basis, ask your lender for assistance; they might be able to suggest options, like alternative payment plans.
2. Pay More Than the Minimum Amount
Budget to pay above the minimum amount on your credit card whenever possible. A minimum payment is always better than a missed or overdue bill, but it may lead to carrying a balance on your account.
On your credit card bill, the statement balance illustrates your credit card activity throughout the past billing cycle; your current balance reflects the entirety of your account's up-to-date charges and fees. You don't need to pay your entire current balance every month to avoid accumulating interest. As long as you pay your statement balance each month, those charges won't carry over to the following cycle and you'll avoid incurring any new interest.
Making the minimum required payment can lead to expensive interest charges, especially if you're carrying a high balance. Even if you can't pay your complete statement balance, always try to pay some measure above the minimum—even just a little extra can help chip away at future debt. Plus, paying over the minimum helps reduce one of your credit score's most crucial components: credit utilization ratio.
Your credit utilization ratio compares how much credit you have available (in individual credit card accounts and total) with the portion currently being used. The lower your ratio, the better, but it should stay under 30% overall. For example, an account with a credit limit of $1,000 should maintain less than a $300 total balance to avoid damage to credit scores.
3. Keep Balances Low by Using Your Card for Necessary Purchases
Use your credit card for essential purchases you would make even without a line of credit—groceries or gas for your car, for example. Avoid using your credit card to purchase items you don't truly need and can't afford to pay off quickly.
Using your credit card for everyday spending can help you build a strong credit history and allow you to earn rewards if your card offers them, such as cash back or travel miles. Plus, charging on a credit card tends to be safer than on a debit card.
Avoid charging more significant expenses, such as rent or medical bills, unless you have high credit limits and know you'll pay off the purchases every month. Larger purchases can take up too much space in your available credit, boosting your utilization ratio and hurting your credit scores.
Common Credit Card Mistakes to Avoid
Making mistakes when managing your credit card accounts can cost you credit score points and penalties. Keep the credit fundamentals above in mind to steer clear of common mishaps, and avoid the following:
Maxing Out Your Credit Card
Using over 30% of your available credit can hurt your credit scores. Maxing out even one credit card can weigh heavily on your overall utilization ratio, so you'll need to give your credit score extra attention for a while if you do.
First, stop charging on your card and implement a budget to prevent any unnecessary spending. Then, make a plan to pay down your debts.
Closing Your Credit Account
Closing credit card accounts can sometimes actually harm your credit score. Open accounts—even rarely used ones—increase the overall available credit reflected in your all-important credit utilization ratio. If that credit line is no longer available, your utilization could spike.
Plus, older accounts may enhance your total credit age, which can be great for your credit score. If the credit line has been open longer than a year, consider options to keep your account active, such as downgrading to a card without an annual fee.
Use your available credit to your advantage. Keep your open accounts in good standing and use them regularly for at least minor payments (such as a subscription to a streaming service) to showcase your dependable payment history.
Not Paying Attention to the Fine Print
Many of us are guilty of not reading the fine print on credit card terms and billing statements, let alone studying all the technical and legal jargon encountered in our daily lives. However, opening a line of credit is like striking an important business deal—don't just skim the contract.
When it comes to your credit cards, it's essential to know what you're getting into. Always review your card's annual percentage rate (APR) as well as fees and penalties (credit card companies are required by law to display these details). Use the information to compare offers and get familiar with your account terms.
Shrugging off reading your monthly statement could also lead to mistakes and overlooked billing errors. Even if you have automatic payments set up, always read through your account statements to check for updates and issues
The Bottom Line
With credit cards, even minor snags have the potential to lead to major penalties. Using your card responsibly will not only help you avoid problems, but can also promote the best parts of owning a credit card, such as reaping rewards and cash back, and building your credit score. If you're not sure where your credit stands, consider getting a free credit score and report from Experian to see where you're at and what you may be able to do to boost your score.
Learn More About Using Credit Cards
- Should I Pay Off My Credit Card Debt Immediately or Over Time?
It's a common credit myth that keeping a balance on your credit card helps your credit. Here's why it's best to pay it off in full if you can.
- Five Ways to Keep Your Credit Utilization Low
Your credit utilization ratio is one of the most important factors of your credit score—and keeping it low is key to top scores. Here’s how to do it.
- 7 Common Credit Mistakes and How to Avoid Them
Building credit can take a lot of time and work, but while developing good habits is important, so is recognizing and avoiding common mistakes.
- How to Avoid Late Payments
When you open a new account, you’re agreeing to make good on your payments. You can avoid late payments by setting up autopay and taking other simple steps.