How to Use a Credit Card Wisely

Credit cards can be powerful tools for building a good credit score, which can open greater financial opportunities like lower interest rates and larger loan amounts. But it can also be tempting to charge purchases on credit cards when you don’t have the cash to pay it off. Used unwisely, credit cards can lead to a destructive debt cycle that’s difficult to break. Read on to learn how to use a credit card wisely and reap the financial rewards.

Importance of Using a Credit Card Wisely

Learning how to manage a credit card wisely has numerous benefits for financial opportunities in the long and short term. First, using credit wisely helps to build a good credit history and improve your credit score over time. This can help you secure better loans, rent an apartment, get a mortgage or get better job opportunities. 

Second, using credit wisely means you’ll more easily be able to budget and manage expenses. If you rely on credit card debt to cover your budget, the additional interest payments can cut your budget and make it harder to get out of debt.

Credit cards can also offer you fraud protection, free FICO scores and other perks such as free travel and cash back that can make credit cards valuable tools for financial planning. Using a credit card wisely can open opportunities for better credit cards and financial resources. 

8 Tips on How to Use a Credit Card Wisely

If you’re ready to use credit cards wisely, there are simple steps to take to optimize benefits and reduce risk. 

1. Know Your Credit Card Agreement Terms

Knowing your credit limits, interest rates and other agreement details will help protect you from unexpected and unnecessary fees. With information about terms, keeping your debt-to-credit ratio below 30% will also be easier, further building your credit score. Common credit card agreement terms to check include:

• Annual fee: The yearly fee for using the card 
• Annual percentage rate (APR): The interest charged on any amount not paid within the billing cycle 
• Credit limit: The total debt permitted on the card
• Billing cycle:  The date one month is closed by your credit card company and the date those funds are due 

Other numbers to check and understand include:

• Balance transfer fees
• Balance transfer APR
• Cash advance fees

2. Schedule Necessary Payments

Scheduling necessary minimum payments is one of the simplest and most effective ways to ensure you build a good credit score and use your credit card responsibly. Setting up automatic payments for the minimum balance due (usually $25 to $100) will help prevent fines. 

With automatic payments, as long as that amount is in a bank account, you’ll never make a late payment again. Because on-time payments make up 35% of your credit score — the most of any factor — this is a must. You can also schedule payments for the full amount.

3. Always Stay Below the Credit Limit

Know your credit limit and stay below it. If you can, stay below 30% of your total credit limit. But if you’re struggling to stay on top of money management, at a minimum, avoid going over credit card limits because if you don’t pay it back on time, you’ll have to pay interest rates that are notoriously high. Your credit card issuer may also decline payments if you go too much over. 

4. Check Credit Reports Regularly

Your credit card reports contain a wealth of financial information. You can monitor your credit score and check for unauthorized transactions, poor spending patterns, incorrect addresses or incorrect charges. 

After checking your credit report and understanding your spending patterns, you can use this to shift habits or cut back to stay within your budget. In addition to www.annualcreditreport.com, most credit card issuers will give you free access to your credit report from one or more financial bureaus. As you pay off debt, make on-time payments and manage credit cards responsibly, you can also monitor the increase in your credit score over time. 

5. Build Up an Emergency Fund

An emergency fund helps to build a financial safety net and prevent credit card debt. If you have a major emergency or unexpected additional expenses and have to exceed your credit card limit, you can use the emergency fund to pay it off. That means you’re prepared for the unexpected, and emergencies from a car breakdown to medical expenses can’t hurt your credit or derail your financial plans. 

6. Avoid Making Minimum Payments

Making minimum payments as an automatic payment is a smart strategy never to miss a payment, but ideally, you should pay off your credit cards in full each month. If you’re only able to make minimum payments, you can get caught in a cycle of debt where nearly everything you pay goes to interest, making it difficult to pay off the original debt. Making minimum payments can also lead to interest rate growth over time, further accelerating the cycle of debt.  

Instead, try only to charge purchases you’ll be able to pay off at the end of the month. If you already have debt, pay off as much as you can each month. You can consider the avalanche or snowball methods to pay off debt. If you carry credit card debt, paying as much as possible each month should be a priority. At the same time, create a budget and stick to it to get into the habit of only spending what you can pay off. 

7. Don’t Get Multiple Credit Cards

It’s easy to lose track of debt if it's distributed across multiple cards. While credit cards can offer great perks if you’re struggling to take control of your credit, stick to one credit card and pay off all credit card debt.

Later, when you’re confident you’ve built strong habits — like sticking to a budget and paying off the card in full each month — you could expand to additional cards with good rewards for your spending habits and goals. 

8. Stay Disciplined

Using credit cards responsibly is one piece of the puzzle to build financial freedom. It requires discipline to stick to your goals and remember what you’re working toward. A few strategies to consider:

• Budget: Create weekly and monthly budgets and stick to them. Credit cards will often report spending categories. 
• Save more: Each week, transfer some percentage into an emergency fund. That way, if you’re forced to overspend, you can still pay it off. 
• Set up automatic payments: Pay the minimum amount due automatically, and if you have enough in your bank account, pay off the full bill automatically each month.  
• Get support: Talk to like-minded family and friends and get their support to spend less and pay off debt. There are also many online personal finance resources, including articles and influencers, to help you stick to your goals.
• Find free activities: To spend less, replacing some expensive activities with other fun, free activities is important. It’s not only about cutting back; think of what you can add to your life that doesn’t add to the debt. Parks and outdoor activities, free museum or theater days and fun events at home can add more to your life. 

How to Use Your Credit Card Wisely

As you start to build strong financial habits and save more, you can also expand credit card opportunities to take advantage of the best credit cards available. When you master how to use a credit card wisely, you’ll reap rewards from lower interest rates and better credit card bonuses to long-term financial freedom.

Frequently Asked Questions