- Choosing a credit card that best meets your needs is instrumental in maximizing the benefits of having a credit card.
- Keeping your balances low and within your monthly budget will help you earn rewards and build credit without going into debt.
- Perks and rewards vary greatly between cards, so research your options fully before settling on a credit card.
A big part of “adulting” is learning how to use a credit card. They are far more than just pieces of plastic you swipe to buy stuff. They can play a huge role in your financial life. How you use your credit cards can impact your financial future — so it’s important to learn how to use them responsibly.
7 tips on how to use a credit card the right way
Credit cards can be great financial tools, as they can help build credit and earn valuable rewards and perks. However, it’s important to use them responsibly and wisely. These seven tips will help learn how to use a credit card the right way.
1. Choose the best type of credit card for you
While all credit cards operate similarly, the specifics can vary greatly between them. You want to make sure the credit card you apply for matches your needs.
Credit cards generally fall into five categories:
Store credit cards: Store credit cards are linked to a specific retailer, such as Home Depot, Walmart, or Amazon. These credit cards are often only valid at that store — though some may also be a Visa, Mastercard, or American Express that you can use elsewhere. A store credit card often has special financing offers, like no interest for six months or a discount at the store offering the card.
Standard credit cards: This is your run-of-the-mill credit card available from various credit card issuers. They will be attached to one of the major credit card networks, such as Visa, Mastercard, American Express, or Discover, and can be accepted anywhere that takes credit cards.
Travel credit cards: These cards are offered with travelers in mind. They often have generous benefits for travelers, such as no foreign exchange fees, unlocked global card use, special privileges at airlines and hotels, and more. Travel credit cards are typically issued by major airlines and hotel networks. However, some banks also issue traveler-friendly credit cards, though they typically lack the airline and hotel perks.
Secured credit card: Secured credit cards work like any other card but with one major difference: The cardholder must give the credit card issuer a security deposit that matches the total credit limit. This protects the credit card company in case you don’t repay your debt. Secured credit cards are generally for those with damaged credit or no credit who want to rebuild or build their credit history. These can be great tools, but watch out for things like annual fees and higher-than-average interest rates.
Balance transfer credit cards: Balance transfer credit cards are typically standard credit cards that include the perk of low- or no-interest balance transfers as an introductory offer. These balance transfers can help you pay off higher-interest debt faster with little to no interest, but watch out for that balance transfer fee, which is typically 2% to 5% of the amount transferred.
Many credit card options exist, so you have plenty of options. The five above are some of the more common types people use today.
2. Only charge what you can pay off monthly
Some people run into trouble with credit cards when they don’t stick to their budget and rack up high-interest debt. The average annual percentage rate (APR) of 24.15%. So if you’re spending more than you can afford to pay off, interest charges can quickly increase your balance.
For example, if you carry a $1,000 balance, you’ll initially pay $20.13 in interest in the first month. But then during month two, those interest charges will be added to your balance, and you’ll be charged interest on the new balance.
The best way to use a credit card is to avoid these interest charges altogether. How do you do that? By paying off the full credit card statement balance each month instead of making just the minimum payment.
Most credit card issuers offer an interest grace period from the statement closing date to the payment due date. That means if you repay your full statement balance by the due date, you won’t be charged interest on the amount you spent during that billing cycle.
3. Use credit cards as tools to build your credit score
Need to build credit? One of the best uses of a credit card is to build your credit score. That’s right, 35% of your FICO Score — the credit scoring model most lenders use when determining creditworthiness — is your payment history, including credit card payment history. That makes on-time payments an extremely important factor on your credit report.
If you make at least the minimum monthly payment within 30 days of the due date, the credit card company will report an “on-time” payment to the major credit bureaus — Experian, Equifax, and TransUnion. These on-time payments can help improve your credit score.
4. Work your credit card into your budgeting
As we mentioned above, the best way to use a credit card is to only spend what you can afford to pay off every month. You can do this by using your credit card instead of your debit card for most transactions, then saving the cash until the credit card bill is due. When the credit card bill comes in the mail or is available online, use the cash in your bank account to pay off the statement balance.
5. Maximize your credit card rewards and perks
The credit card industry is highly competitive, so financial institutions look for creative ways to attract new credit customers. The go-to method for many companies is to offer rewards credit cards and other valuable perks.
Credit card rewards come in various shapes and sizes, such as cash back, points, statement credits, gift cards, travel rewards, and more. When looking for your first credit card — or any time you’re considering a credit card — compare their rewards programs and find one that closely matches your shopping habits and desires.
For example, if you don’t drive a vehicle, you likely don’t need a credit card that offers rewards points on gasoline purchases only. However, a card offering the highest rewards points on travel and other travel-focused perks is a good choice if you travel often.
Credit cards often have tiered points systems where you get the highest rewards at certain retailers, lower rewards at others, and a base reward amount for all other purchases. This is how that may look:
5% reward on all travel and hotel purchases
3% reward at all grocery stores
1% reward on all other purchases
Just remember to review both ends of the rewards system: how you earn them and what you can spend them on.
Some of the perks you may see include:
Free TSA PreCheck and Global Entry
Discounts at selected retailers
Collision insurance on rental cars
Priority boarding on select airlines
Discounts on gasoline
Free travel insurance
Review the credit card terms carefully to get all the deets about your card’s rewards and perks.
6. Keep your balances as low as possible
Having a credit card can go a long way in helping you build credit, and it can help you manage your cash flow throughout the month. However, you want to remain conscious of your available credit, credit limit, and total balance. You also want to try to avoid carrying a balance from month to month, as this can lead to costly interest charges.
If you overspend on your credit card, you can end up with a high credit utilization ratio — the total amount of credit card debt relative to your total credit limit. Most experts say a credit utilization ratio under 30% is ideal, but ultimately, the lower it is the better it is for your credit score. Your credit utilization ratio plays a strong role in the amounts owed variable in the FICO scoring model, accounting for 30% of your credit score.
So, if you have a $1,000 credit limit, you might want to keep your monthly charges at $300 or less.
7. Use auto-pay if possible
Credit cards can be useful tools, but one late payment can result in a costly late fee. And if you fall more than 30 days late, the credit card company can report the late payment to the three credit bureaus, potentially damaging your credit history and score.
If your credit card issuer offers it, use the auto-pay feature. Even if you forget about the payment, this feature will automatically pay the amount you request monthly. Ideally, you can schedule the auto-pay to pay off the entire statement balance to avoid interest charges. Or, you can set it to just cover the minimum monthly payment as a safety net against late fees.
Knowing how to use a credit card can give you a solid financial foundation
Credit cards can be useful in many ways, such as helping someone with a variable income pay their bills throughout the month or earning you valuable rewards. By knowing how to use a credit card correctly, you can maximize these benefits without risking your credit score or financial health.
Greenlight can help you learn more about credit cards, building credit, and more.
Visit the Greenlight blog to boost your credit knowledge and build your confidence when it comes to using credit.
Hey, $mart parents 👋
Teach money lessons at home with Greenlight’s $mart Parent newsletter. Money tips, insights, and fun family trivia — delivered every month.