How to use a credit card

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Getting your first credit card can feel intimidating. But once you get the hang of it, you’ll likely find that paying with plastic can be much more convenient than paying with a debit card or cash.

You can pay for your purchases by inputting your credit card numbers online, using a mobile wallet or swiping your card in a store. Credit cards also give you the chance to pay off your balance later on. And, if you need to spread your payments out over several months, you can easily do so provided you make at least the minimum payment on your account.

If you’re wondering how to use a credit card to build credit, then you should know this part happens naturally as you use your card for purchases and pay your bill on time each month. Beyond the benefits of building credit, the best rewards credit cards even let you earn cash back, gift cards, merchandise, travel and more.

That said, credit cards do come with their share of pitfalls, including the potential for debt. Before you dive into using credit on a regular basis, you should know and understand exactly how credit cards work—and what to watch out for.

How credit cards work

Credit cards are easy to use, and that’s true whether you plan to use credit to make purchases in-person or online. When you shop in-person with a credit card, all you have to do is swipe, insert or tap your card at the payment terminal. When you do this the amount of the purchase will be subtracted from your line of credit and added to the balance of what you owe for the billing cycle. When you shop online, you’ll enter your credit card number and personal information in order for the purchase to be charged to your account.

How does your line of credit work? As an example, let’s say you’re approved for a credit card and given an initial credit limit of $1,500. If you used your credit card for an in-store purchase of $100, you would have a balance of $100 on your credit card, and the amount of available credit you have would decrease to $1,400.

Credit cards allow you to make multiple purchases during a billing cycle without having to pay them off immediately. Once your billing cycle has ended, you will receive a bill with the total of your purchases, plus any added interest and applicable fees.

While you are not required to do so, it’s a great idea to pay off your balance before the end of your billing cycle. When you pay your credit card balance in full each month, you are not charged any interest on your purchases. When you carry a balance and do not pay your credit card bill in full, on the other hand, interest begins accruing on the balance you carry to the next month.

The choice to pay your balance in full or not is really up to you, but you do have to pay a minimum payment on your card each month, which is usually around 3 percent of the balance you are carrying. If you do not make at least the minimum payment on your credit card account, you could be hit with late fees and a penalty interest rate, and your credit score will likely be impacted in a negative way.

How to use a credit card wisely

Signing up for a credit card doesn’t guarantee a positive result. In fact, using a credit card irresponsibly (i.e., charging purchases you don’t need, paying your bill late, etc.) can cause your credit score to plummet and even leave you in a cycle of debt that is hard to escape. If you’re wondering how to use a credit card wisely, here are some important tips to keep in mind.

Only charge purchases you can afford to pay off

The average credit card interest rate is currently over 16 percent, which means carrying a balance will quickly become a costly endeavor. With that in mind, you should strive to only charge purchases you can afford to pay for when your bill comes due.

If you need to borrow money for the long-term, you may want to consider an alternative like a personal loan instead.

Track your spending throughout the month

While using a credit card for purchases can be extremely convenient, it’s easy to forget what you’ve charged since the money doesn’t actually come out of your wallet or bank account. As a result, you’ll want to be mindful about tracking your spending throughout the month to make sure you don’t overdo it.

You can track your spending manually if you want, making a list of purchases you have made using pen and paper. You can also log into your online credit card account page to see what you’ve spent throughout the month, or you can download your bank’s mobile app and track your spending on your mobile device.

There are also a number of budgeting apps designed to help you monitor your spending.

Carry a balance only when you have a plan

If you decide to carry a balance, it’s smart to sit down and create a plan to pay it off over the short-term. If you rack up debt and continue spending more without any plan to pay it off, the interest you’ll pay on your credit card bills can swell dramatically over time.

Choose the right credit card for your needs

For this reason, you may even want to be extremely mindful about the type of credit card you sign up for. If you know you may need to carry a balance, for example, you should consider signing up for a 0 percent APR credit card, many of which do not charge interest on purchases for 12 to 18 months. If you already have high interest debt you want to consolidate, on the other hand, then a balance transfer credit card could leave you better off.

If you don’t plan to carry a balance, then a rewards credit card could be your best bet. With the best credit cards on the market today, you can earn cash back, flexible rewards or points for travel for each dollar you spend, and you may even be able to earn a generous welcome bonus off the bat.

How to use a credit card to build credit

One of the biggest benefits of credit cards is the fact they can help you build credit on a consistent basis. This is based on the fact that, when you charge purchases to your card and pay them off, your credit card movements are reported to the three credit bureaus—Experian, Equifax and TransUnion. If you want to use a credit card to increase your credit score, here’s what you’ll need to do:

Always pay your bill on time

Your payment history is the most important factor that makes up your FICO score, accounting for 35 percent. As a result, it’s crucial to pay your credit card bill early or on time each month. If you pay your bill past its due date, you can cause harm to your credit score.

Keep your credit utilization low

The amount you owe in relation to your credit limits—known as your credit utilization—makes up another 30 percent of your FICO score. Experts recommend keeping your utilization below 30 percent of your available credit for the best results, which means maintaining a balance of $3,000 or less for every $10,000 in available credit you have.

Don’t open or close too many new accounts

New credit makes up another 10 percent of your FICO score, and each new card you apply for will result in a hard inquiry on your credit report. Meanwhile, the average length of your credit history makes up 15 percent of your FICO score, and older accounts can be a boon in this category—even if you’re not using them. With these details in mind, you should shy away from opening too many new accounts or closing old accounts that may be helping your score.

How to earn rewards

One final benefit to consider when using a credit card is the potential for rewards. While not all credit cards offer rewards points, some of the best credit cards on the market today let you earn cash back, flexible rewards, airline miles, hotel points and more.

Earning rewards with a credit card is easy to do. All you have to do is use a rewards credit card to pay for purchases and you’re generally awarded a flat percentage of rewards or “points” based on your card’s rewards structure. Just keep in mind that you’ll only really end up “ahead” with rewards if you refrain from carrying a credit card balance and paying interest on your purchases. To maximize the rewards you can earn with a credit card, you should:

Research rewards credit cards

It’s important to find the right type of credit card for your needs. Make sure to compare cash-back credit cards, travel credit cards and general rewards credit cards during your search.

Compare rewards structures

Some cards offer more points or miles in specific categories you may spend a lot in, such as groceries or gas. Compare cards to see which ones might help you rack up more points over time.

Look for welcome bonuses

The best rewards credit cards on the market today offer generous sign-up bonuses that can be worth $500 or more when you spend a set amount of money on your card within a few months. Make sure to see how cards stack up in terms of their bonus offers and choose one with a minimum spending requirement you can easily meet.

The bottom line

It’s wise to choose the right card for your needs in the first place, but you should also be wary of spending more than you planned. Credit cards can almost be “too convenient” at times, which is often how people get into trouble. With that in mind, you should start using a credit card with caution at first and make sure you are always the one in control. Credit cards can work as valuable financial tools, but only if you are intentional and responsible with the way you use them.

Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson began her career working in the funeral industry, which may make you wonder why she works in personal finance now. Yet, the funeral industry taught the author everything she needs to know about the value of one's money and time. Johnson left the mortuary business a decade ago in order to explore her passion for personal finance and travel the world, and since then, she and her husband have built a debt-free lifestyle that has them on the path to retire very wealthy in their 40s. Holly's love of budgeting also led to the creation of her debt payoff book, “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love."