How to use a credit card

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Getting your first credit card can feel like a big step into adulthood. Credit cards open the door for you to be able to make certain purchases that you may not have been able to afford to pay for upfront. The beauty of a credit card is the revolving balance it allows you. And as long as you are using your credit card responsibly by making your payments on time and not going over your spending limit, you will be able to build a strong credit score that makes future financial actions, like a loan or mortgage, easier.

Benefits of getting a credit card

There are lots of benefits to having a credit card available to you, but here is a short list of some of the big ones.

How a credit card works

Using a credit card is actually pretty easy. When you go to a merchant that accepts cards, and most do, you have them swipe your card instead of paying with cash. 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. 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 not required, it’s a great idea to pay off your balance before the end of your billing cycle. Doing so will mean that you don’t have to pay any interest on those purchases. If you’re not able to pay off the balance immediately, the amount of the balance plus added interest will show up on your bill for that billing cycle. You can choose to pay it off then, if possible. If not, you can pay the minimum payment, which is usually 3 percent of the balance you are carrying. Just know that whatever is left on your balance will be carried over to the next billing cycle and continue to accrue interest.

Choosing the right card

There are a lot of credit card options out there. Choosing the best card for you begins with knowing what’s available. Some of the major credit card categories are travel, cash back, business, and student. Think about how you plan to use your credit card once you have it and what kinds of rewards you may want to earn, like travel points or cash back. Also consider whether you will be carrying a balance and how much interest you will have to pay if you do so.

Next, factor in your credit score, which is a part of your credit report. Your credit score is used by credit card issuers to determine your creditworthiness. If you are just getting started with credit, you may have a low credit score. A good card for you would be one that is meant to build credit. For example, if you’re a student just starting out with credit, the Discover it® Student Chrome is a good choice. It is meant for students with no credit history and offers a $20 statement credit every year (for five years) if your GPA is over 3.0.

If you have some experience with credit and have built your score up to the good to excellent range, your options will open up a bit more. For example, you could apply for a cash back rewards card like Capital One® Quicksilver ® Cash Rewards Credit Card. With this card you’ll get an unlimited 1.5 percent cash back on all purchases, and have an introductory zero percent interest APR for the first 15 months (15.49 percent to 25.49 percent variable thereafter).

The bottom line when choosing a credit card is that it should help you achieve some spending goal that you have, offer benefits that you don’t currently have with other cards, fit with your credit score and spending habits, and minimize fees. If you want a bit of help choosing the right card for you, Bankrate has a comprehensive credit card guide to help you through the process.

Plan your spending

Using a credit card responsibly involves budgeting for the purchases you intend to make. It’s easy to just pull out the plastic when we want to make a purchase and don’t have cash with us, but that can lead to overspending. And overspending is a slippery slope to maxing out your credit card and having a lot to pay back. A good rule of thumb when planning how you will spend with your credit card is to use it like a debit card. Try to only make purchases that you know you have the cash to cover.

If you are planning to use your credit card for large purchases, make sure you have a plan for repaying those purchases. Ideally, you want to pay your balances off early and in-full to avoid added interest. Bankrate has a credit card payoff calculator that can help you figure out how much you need to pay each month to pay off your card. You can also use credit card apps to help keep track of your balance and earned rewards. And if you’re using your credit card app along with a personal finance app, you can have access to your budget and manage your credit cards at the same time. This can help you to keep up with your account balance on a regular basis and stay on budget.

How to make payments

Your credit card issuer will send you a bill for your purchases every month. Usually, bills are sent out at the end of the month, though some issuers may send it out on the 15th. Once your bill arrives, you have three options for payment. You can pay the whole balance, you can make the minimum payment, or you can designate a specific amount. Paying in full is almost always the better option because you won’t have to worry about accumulating interest on a growing balance. If paying in full isn’t possible, paying at least the minimum is the next best option. Paying less than the minimum can have serious consequences and should be avoided.

When you make your payment, it’s important that you make it on or before the due date. One way to assure that that happens is to set up automatic payments. You can set the amount you would like to pay each month to be drafted from your bank account and put it out of mind. You can also request your provider change your credit card bill date to schedule payments around paydays when you know you’ll have cash. This is also helpful if you have multiple cards and have to manage multiple payments.

Another option for making payments is to pay online through your credit issuer’s website. Simply login into your account and follow the prompts for making a payment. You can also make your payment over the phone. You should be able to find instructions for how to do so on your bill.

How to earn and use rewards

Rewards cards give back for the purchases you make, in the form of cash back rewards, travel rewards, gas rewards, etc. In order to make the most of your rewards card, it’s important to understand your rewards structure. For starters, make sure you take advantage of your welcome bonus. Most rewards cards will offer a pretty hefty bonus if you spend a certain amount of money in an introductory period, usually three months.

Another important feature to understand in your rewards structure is how much purchases will actually earn. For example, the Blue Cash Preferred® Card from American Express offers 6 percent cash back at U.S. supermarkets (on up to $6,000 per year, then 1 percent), and then 3 percent cash back at U.S. gas stations. If you make the majority of your credit card purchases when you shop for groceries, this is a great card for you. If you have more varied spending, you may want to look at a card like the Chase Freedom Unlimited, which offers 1.5 percent cash back on all purchases. This makes it a great general purpose card for earning rewards no matter where you shop.

While the aforementioned cards have fixed rewards, others have rewards that rotate. For example, the Discover it®  Cash Back card offers 5 percent cash back in different categories that rotate every three months (up to the quarterly maximum, then 1 percent, activation required). Discover offers to send you notifications when rewards categories change so that you can opt-in and make the most of your card purchases.

Aside from knowing the rewards structure, it’s important to redeem your points in a way that will maximize their output. For example, if you have a travel rewards card, you will get more out of those points by redeeming them for actual travel. You may have the option to use them for something else, like a gift card, but that will decrease their value. Another way to maximize points is to combine the rewards of different cards. Being savvy about how to earn and use rewards can take some time and research, but is definitely worth it when you start to see your rewards grow.

How to build credit

Having a credit card sets you up for building your credit. Good credit will open doors to better interest rates on loans, higher tier credit cards with bigger rewards packages, and more pre-approved finance options. If you are using your credit card responsibly, you will be able to build your credit with ease, getting to a coveted good to excellent credit score. The road to this coveted score is through your payment history and credit utilization. These two factors make up a total of 65 percent of your credit score.

Payment history refers to your history of making payments on any money you have borrowed formally, including your line of credit through your credit card. If you are paying your credit card bills on time and have no other outstanding debt, your payment history will be in a good place. This is true even if you’re only paying the minimum amount each billing cycle. However, as easy as it is to keep your payment history in a good place, one late payment can cause ruin. A late payment stays on your credit report for seven years, and frequently missed payments are a surefire way to decrease your credit score.

Credit utilization is the other big factor in keeping a good credit score. It refers to the amount of credit you have versus the amount of credit you use. A general rule is that your credit utilization should be between 10 and 30 percent of your credit line. This means that if you have a credit line of $1,500, you should only be using $150-$450 of it at any given time. If you make a purchase that takes you over this amount, it’s important to pay it off or down as soon as you can. Otherwise, your credit score could take a hit.

The bottom line

Credit cards are great financial tools. However, as with all tools, it’s important to choose the right one for the job and to learn how to use it properly. When choosing a credit card, make sure you do your research first to find the best card for you. And practice good spending habits, like budgeting and repayment plans, to make sure you maintain your tool well.