How to Use a Credit Card (The Right Way)

Some people do not like credit cards and refuse to use them. They see them as a trap that can lead you into deeper debt. I disagree. The real difference is the way you use your credit card. If you use it in the wrong way, it can hurt you. But, if you use it correctly, a credit card is actually very helpful.

We’ve before discussed why credit cards can be helpful. In short, a credit card can give you better consumer protection, help you build better credit, and give you some rewards. But you have to use it the right way in order for it to be worth it.

Choose one that works for you

The first step to using a credit card the right way is to choose a credit card that works for you. There are a ton of options and you have to look at their benefits and your life. Maybe you want a card with a local bank where you can go to the local branch. That’s okay. Maybe you want a card that has good travel benefits. That’s cool too. Or maybe this is your first card and you need a secured card. That is perfectly fine too.

You don’t need the fancy card that everyone else talks up. You need the card that actually works for you.

Pay it off every month, on time

This may be the biggest part of using your credit card the right way – you need to pay it off every month, on time. Doing this is what shows that you can pay your obligations. Over time, you’ll build a stronger credit history and score.

Your credit card statement, website, or app will show you what your due date is. Make sure you always know when this is and pay on time. It usually takes a couple of days for the company to actually get the payment. I recommend paying a few days early to make sure the payment posts by the due date. If you have a late payment, you risk penalties and negative marks on your credit report.

But, how much do you need to pay? At the least, you NEED to pay the “minimum payment” due. This is what will prevent you from having a late payment. However, if you only pay the minimum payment, you’ll also owe interest.

Instead, try to pay the “statement balance” by the due date. This way, you won’t pay interest on your purchases.

Note: Credit card companies can charge interest on balance transfers, cash advances, and certain other circumstances. Please read the fine print for your specific card.

Use rewards

If you are eligible, I recommend getting a rewards credit card. There are many options out there. If you get rewards on credit card purchases (and you pay your card off on time), you’re making out better than you would by paying with cash.

You’ll want to find a good rewards card. Make sure it meets all your other needs. Then, look at the rewards that you can earn. Try to get the highest amount back for purchases. (At least 1-2% is common on a cashback card.)

But, make sure you’ll actually use the rewards. Travel rewards are awesome – but only if you travel. Another common option is cashback. This is a great option for most people.

Check your purchases frequently

You should look through all your purchases frequently. This should be at least once a month (perhaps, when you pay off your balance).

But why is this helpful?

The biggest reason is that it can help you find and take care of fraud issues. The sooner you catch them, the better. But many times, you’ll only find fraud if you are looking.

I’ve only had fraud happen once. I was paying my bill and happened to be in Disney World at the time. (go figure!) As I scrolled through my purchases, I saw one for Home Depot in New Jersey. That was definitely not me. (I was in Disney and don’t live in NJ anyway.) I was able to call my credit card issuer and quickly get it resolved.

The second reason it may be helpful is in analyzing your own purchases. It’s a good idea to look at what you spent over the month so you’re aware of it. I strongly recommend keeping a spending tracker, but this is also a good option.

Increase your credit limit once a year

Once a year, you should ask for a credit limit increase. This means is that you’ll have a higher available credit limit.

Doing so will give you a higher available limit compared to current balances. Over time, this can help raise your credit score. It can also give you peace of mind if you use your credit card as part of your emergency spending plan.

Asking for a credit limit increase is relatively painless. You simply have to call and say you’d like one. Your credit card issuer will let you know if you are eligible or not. Be sure to ask if there will be a soft or hard credit inquiry. I usually try to stick to soft inquiries only, but every few years may go with one even if it has a hard inquiry. The choice is up to you depending on how you feel about your credit score.

A credit card is a great tool to add to your personal finance toolbox. But, you need to be sure you are handling it the right way. Let us know if you have other tips for using your credit card effectively in the comments.

Photo by Soragrit Wongsa on Unsplash