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Credit cards can be a valuable tool to reaching a wide range of financial goals.
With the right card, you can do everything from funding a large purchase to building your credit score, or simply earn great rewards on everyday spending. Understanding common credit card uses can help you make smart credit choices. If you’re hoping to save money on your next big vacation, for example, earning points and miles with a travel credit card can help.
Before you start using your credit card, you’ll need to get one first. You’ll want to decide why you want a credit card and how you want to use it, so that you can get one that best meets your needs. It’s also important to be realistic when considering what type of credit card will best suit your spending habits or financial goals — so, check your credit score and make sure your credit card application is likely to be approved. Bankrate’s free CardMatch tool can quickly match you with a credit card that best fits without affecting your credit score.
After you’ve chosen the right card for your goals, you’re ready to start maximizing it.
This guide takes you through the steps in using credit wisely, so you can reap the benefits while you avoid the things that could lower your credit score, make it more difficult to earn credit card rewards or lead you on a path toward credit card debt.
Learn how to read your credit card statement
A great first step to responsibly using your card is understanding what’s in your monthly statement — or a summary of your card use over a specific billing period. Though they can look different depending on your issuer and whether you’re receiving your bill in the mail or online, important statement details include:
- Your new or current balance. This is the total amount charged to your card. Most statements break it down into your previous balance, payments, credits and any balance transfers or cash advances, as well as any interest you’ve incurred on these charges.
- Your minimum balance due. This is the lowest amount your issuer will accept toward your balance. Your minimum balance can range from 1% to 5% of your balance, depending on the issuer.
- Your due date. This is the date by which you must pay at least your minimum balance to avoid late fees and other penalties. For most cards, your payment is due by 5 p.m. on your due date to avoid late fees and penalties.
Most statements also break down interest charge calculations, any changes to your APR and legal disclosures covering your rights, your responsibilities and guidance as to what to do if you spot fraudulent charges or errors.
Understand how your credit card’s interest is calculated
Your APR is the interest rate you’ll pay for charges you carry from month to month. But it’s likely your issuer compounds your interest using a daily periodic rate — or DPR. Your DPR is interest that’s added to your original charges daily over the month of your billing cycle.
The DPR is calculated by dividing your APR by the number of days in a year (or 360 for some issuers). You can calculate your daily interest charges in three steps:
- Find your current statement balance and your APR.
- Divide your APR by 365 to find your daily periodic rate.
- Multiple your current balance by the daily periodic rate.
Understanding how daily compounding works helps you to see how easily it is to fall into debt if you’re not careful with spending and payments.
Pay your credit card bills on time
Always make at least your minimum payment each month by your statement’s due date. If you miss a credit card payment, not only does your credit score take a hit, but you could also get stuck with late fees and penalty APRs. Miss too many payments, and your debt could go to collections.
A better strategy is to pay your credit card bill in full whenever possible to avoid accruing interest, which makes your purchases more expensive in the long run. If you can’t pay in full, pay off as much as you can by the due date to reduce the balance you’ll pay interest on.
Be aware of any credit card fees
Credit cards come with various types of fees that can sneak up on you. Common fees that you’ll see on your statement include:
- Annual fees
- Balance transfer fees
- Cash advance fees
- Foreign transaction fees
- Late payment fees
Also keep in mind that your credit card may start off with an introductory APR for a specific period of time. Say you open a balance transfer credit card that offers a 0 percent APR on transferred balances for up to 15 months from account opening. After those 15 months, your interest rate will revert to the typically substantially higher regular APR that will apply to any remaining balance on your card.
Keep an eye on your balance
You can build a positive credit history by using your credit card on a regular basis — but be mindful of spending too much of your available credit. Lenders don’t like it when you max out your credit cards, and your FICO and VantageScore credit scores can dip if your balances are too high.
In general, it’s a good rule of thumb to keep your credit utilization ratio below 30 percent. Your credit utilization ratio measures how much of your available credit you’re currently using. It makes up 30 percent of your credit score, which means a high credit utilization ratio typically correlates with a lower credit score.
It means that if your credit limit is $1,000, you should keep your revolving balance below $300. If you make a purchase that takes your balance above $300, prioritize paying it off as quickly as possible to avoid taking a hit to your credit score.
Improve your credit score
Using a credit card to build good credit habits is among the best ways to improve your credit score. Paying on time and keeping your utilization low helps a lot, but you’ll have the most success if you understand exactly how your credit score is calculated.
Your FICO credit score, for example, is determined using the following five factors:
- Payment history — 35 percent
- Amounts owed — 30 percent
- Length of credit history — 15 percent
- Credit mix — 10 percent
- New credit — 10 percent
Nail down the five components of your FICO credit score to build or rebuild your credit score:
- Make all of your payments on time.
- Keep the amounts you owe as low as possible.
- Keep your credit accounts active so that you build a long — and positive — credit history.
- Apply for different types of credit accounts, such as credit cards, car loans and mortgages, over time.
- Avoid applying for a lot of new credit at once.
If you follow these steps and practice them over time, you’ll show potential lenders that you can use credit wisely, and your responsible credit use will be reflected in your credit score.
Earn and redeem credit card rewards
A big benefit of using credit cards is saving money on your purchases. To get the most use out of your credit card, make sure you’re both earning and redeeming all of the credit card rewards available to you.
First, keep track of which purchases earn the most cash back, points or miles on the cards you own. For example, say you have a cash back card that offers 3 percent cash back at gas stations and grocery stores. Each time you make a purchase in one of those categories, make sure you pay with your credit card to maximize your rewards.
You’ll also want to figure out which redemption options offer the highest value. Many people don’t realize that redeeming credit card rewards for gift cards, for example, is often less valuable than redeeming the same rewards for travel purchases or statement credits.
Every credit card’s rewards structure is slightly different, but once you learn how rewards credit cards work and how you can maximize your credit card rewards, you’ll be able to use your card’s points, miles or cash back to save money on nearly every purchase.
Leverage multiple credit cards
Once you know how to use credit wisely, you might want to think about adding a second credit card to your wallet. It can pay to choose a card that complements your everyday credit card. If you have a Chase credit card, for example, adding a second Chase card to your wallet can allow you to pool your Chase Ultimate Rewards and increase your redemption options. Or you might want to consider pairing a flat-rate cash back rewards card with a rotating bonus category rewards card, giving you the opportunity to earn high-level rewards on nearly every purchase.
You don’t need to rush to apply for another card immediately, though. In most cases, it’s a good idea to wait three to six months between credit card applications — that way, you won’t risk damaging your credit score with too many applications at once.
Be aware that some credit issuers have restrictions that will limit your ability to apply for new credit or earn sign-up bonuses on new cards. Chase’s 5/24 rule, for example, reduces access to cardholders who have taken out more than five credit cards with any issuer in the past 24 months. But, as long as you plan carefully, you can take advantage of some great credit card combinations.
The bottom line
Want to know how to use a credit card? Start by choosing the right card for your needs. Then, make every payment on time and keep your balances as low as possible. Learn how your credit card use affects your credit score, and work to build a positive credit history. Make sure you take advantage of all the rewards and perks that come with your credit card, and, when you’re ready, compare cards to find a second that can help you maximize your rewards.