6 tips on how to use a credit card wisely

Bankrate Logo

Why you can trust Bankrate

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for . The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Terms apply to the offers listed on this page.

A lot of people know how to use a credit card—but not everybody knows how to use a credit card wisely.

If you want to use a credit card to build credit, you need to understand how on-time payments and credit card balances factor into your credit score. If you want to get the most out of your credit card accounts, you also need to ask yourself whether you’re taking advantage of all of the benefits that come with your credit card—from cash back rewards to travel perks.

Want to know how to properly use a credit card? We’ve got six tips to help you understand how to use credit well.

Make on-time payments every month

Want to know how to use a credit card wisely to build credit? Start by making on-time payments—every time. Credit card payment history makes up 35 percent of your FICO credit score, which means that a positive payment history is an essential part of building and maintaining good credit.

Even a single missed payment can have serious negative effects on your credit score, so do everything you can to ensure you get those payments in on time. Most credit card issuers let you set up automatic payments, which is one way to help you stay on top of your credit card bills.

If you want to use credit the right way, the best thing you can do is keep up with your credit card payments—and remember, making at least the minimum payment on time is always better than making no payment at all.

Pay off your balances in full whenever possible

In addition to making on-time payments every time, it’s a good idea to pay off your credit card balances in full whenever possible.

You might not realize this, but most credit cards offer a grace period on new purchases—and if you pay off your purchases in full before the grace period expires, you won’t have to pay interest on those purchases. Miss a payment or make a partial payment on your statement balance, and your grace period will disappear. That means your credit card issuer will charge interest not only on your current balance but also on any new charges you add to your credit account.

Taking advantage of your credit card grace period isn’t the only reason to pay off your balances in full. Every time you pay off your credit card balances, you lower your credit utilization ratio and boost your credit score. Plus, paying off those balances means staying out of credit card debt.

Keep your credit utilization ratio low

Why is it a good idea to pay off your credit card balances as often as possible? Because every dollar of debt you carry on your credit cards adds to your credit utilization ratio. Your credit utilization ratio represents your available credit versus your current debt, and it accounts for 30 percent of your FICO credit score, making credit utilization the second highest factor in your credit score after your payment history.

If you want to understand how to properly use a credit card, you need to understand how your credit utilization ratio affects your credit score. To maintain a good credit score, you’re going to want to keep your credit card balances below 30 percent of your available credit. This means that if you have $5,000 in available credit, you should avoid carrying a balance higher than $1,500.

If you want to go from good credit to excellent credit, you’ll want to get your credit utilization ratio even lower. How much lower? People with perfect credit scores tend to keep their credit utilization ratios below 5 percent—so use that as your goal if you’re trying to take your credit score above 800.

What happens if you want to put a large purchase on your credit card or use more than 30 percent of your available credit? You can temporarily carry a higher balance as long as you bring your credit utilization down below the 30 percent mark when you make your next credit card payment. Otherwise, your high credit utilization ratio could have a negative effect on your credit score.

Manage your credit card debt

We understand that it’s not always possible to pay off your credit card balances in full every month—so how do you use credit wisely if you’re carrying a balance on your credit card?

The answer is simple: Make a plan to help you manage your credit card debt. Whether your revolving credit card balance is a few hundred dollars or a few thousand, having a plan to pay off your balance and get out of credit card debt is the best thing you can do for your financial health—and you’ll probably boost your credit score along the way, so consider it a win-win.

How do you pay off credit card debt? There are many ways to deal with unpaid credit card balances, whether you create a budget that allows you to put more money toward your credit card debt, use the snowball method to pay off your smallest debts first or transfer your balances to a credit card that’s offering a year (or more) of 0 percent APR on balance transfers.

If you are currently carrying credit card debt, managing that debt—and making a plan to pay it off—is the most important thing you can do.

Use the benefits that come with your credit card

While a big part of using a credit card properly is about focusing on staying out of debt and building your credit score, most top credit cards offer a lot more than the ability to make purchases and build a positive credit history.

Today’s best credit cards also come with benefits that range from purchase protection to rental car insurance to complimentary airport lounge access—which means that if you aren’t using the benefits that come with your credit card, you could be leaving money (and perks) on the table.

How do you know which benefits your credit card offers? Most credit card issuers will send you a guide to benefits along with your new credit card. If you’ve already tossed that paperwork into the recycling bin, log in to your credit card account to see what benefits are currently available. You can also always contact credit card customer service to learn more about your credit card’s benefits.

Know how to maximize your credit card rewards

There’s one more way to use a credit card wisely—and that’s to maximize your credit card rewards.

If you have one of today’s top rewards credit cards, you’re probably earning cash back, points or miles on every purchase—but do you know which purchases earn the most points or the highest percentage of cash back? If you have more than one rewards card, do you always use the card that earns the highest rewards for the purchase you’re about to make or do you use the card that’s most convenient, even if it doesn’t earn you as many points or miles?

Knowing how to earn rewards is just the first step. You’ll also want to know how to redeem them at their highest value. This might mean using your rewards to book travel through a credit card issuer, transferring your rewards to another travel loyalty program or using your rewards to make purchases through PayPal or Amazon.com. The more you know about how to redeem your credit card rewards, the better you’ll get at redeeming those rewards for the highest value possible.

The bottom line

Use your credit card wisely by making on-time payments and paying off your balances in full whenever possible. If you have credit card debt, create a plan to help you manage your debt and start paying it down.

Keep in mind that using a credit card to build credit is only the beginning. To get the most out of your credit card accounts, make sure you’re taking advantage of all of your credit card benefits and earning and redeeming your credit card rewards for their highest possible value.