How to use a credit card
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Credit cards can help you achieve various financial goals throughout life.
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 have to get one first. You should 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 CardMatch tool can quickly match you with a credit card that best fits — it’s free and won’t impact your credit score.
After you’ve chosen the right card for your goals, you’re ready to start maximizing it.
This guide will take you through all of the steps involved 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.
Pay your credit card bills on time
You always need to pay your credit card bills on time.
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, and always make at least the minimum payment.
What happens 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.
You can avoid these consequences by making your credit card payments a priority. Set up mobile alerts and credit card autopay if you’re worried about accidentally forgetting when a credit card bill is due.
Be aware of any credit card fees
Credit cards come with various types of credit card fees. You can familiarize yourself with any that may sneak up on you by reading your card agreement. Some common fees include:
- Annual fees
- Balance transfer fees
- Cash advance fees
- Foreign transaction fees
- Late payment fees
Make sure you understand your credit card’s terms, as well as the interest rate, so you aren’t hit with any surprise charges you could have avoided in the first place. And while some fees depend on how you use your card, you might want to look for cards that specifically charge no annual fees or no foreign transaction fees if those are costs you’re trying to avoid.
Also, keep in mind that your credit card may start off with an introductory APR for a predetermined period of time. For example, 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 is going to go up to its (typically substantially higher) regular APR and will apply to any remaining balance on the 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 idea 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. In other words, if your credit limit is $1,000, you should keep your revolving balance below $300. If you want to make a purchase that takes your balance above $300 you can, but make sure to pay 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 one of the best ways to improve your credit score. Paying on time and keeping your utilization low can help a lot, but you’ll have the most success when 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)
How do you use a credit card to improve your credit score? Here are five tips to help you ace the five components of your FICO 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
One of the biggest benefits 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 could start thinking about adding a second credit card to your wallet. It can pay to choose a card that complements your current credit card. If you have a Chase credit card, for example, adding a second Chase card to your wallet will 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.
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, choose a second credit card that can help you maximize your rewards.