If you’re new to credit or just unsure about how to use a credit card, have a seat and get comfortable. You’ll have credit clarity in about four to six minutes, depending on how fast you read this.
Credit cards are very useful for building — or rebuilding — credit, but there are also situations where using a credit card can help you save money. So, let’s hop right into the five best ways to use a credit card.
1. Use a Credit Card to Build Credit
When you learn how to use your credit card the right way, you’ll see your credit standing improve. To move things along more quickly, use less than 10% of your credit limit during the month, pay the balance in full by the due date and monitor your activity online.
Remember to pay all of your bills on time, not just your credit card bill. It takes time to establish (or rebuild) credit, so if you’re new to this, be persistent and patient. In time, you’ll develop a great credit score.
2. Use a Budget to Limit Credit Card Spending
You have to start with a good financial foundation. Think of this like the concrete foundation of a new house. If there’s a crack in the foundation, your house is in trouble before you even move in.
Likewise, you shouldn’t even get a credit card before you’ve set up a budget and have a way to track spending. Once you set up your budget, you can decide which expenses you want to put on your credit card and how much that amount should be. Your goal is to pay your credit card bill in full by the due date. So make sure the budgeted amount works with your cash flow.
[READ: Best Credit Cards for Young Adults.]
3. Earn Credit Card Rewards
An excellent way to fight back against high prices is to use a rewards credit card. There are different types of rewards cards, and most offer cash back, points or miles. Each rewards credit card also has its own rewards program.
Take the time to understand your rewards program so you’ll know when to use each credit card at the right time. For example, if you have a cash back credit card that offers 3% on groceries, then make sure that’s the card you use when you go grocery shopping.
You’ll be glad you took a thoughtful approach when you see your rewards balance. I have an airline-branded credit card, and I always have enough miles every year for a few free — or deeply discounted — flights. I also have a cash back card that has rewards on everyday expenses. This is called using credit cards strategically, and that’s how you can maximize your earnings.
You’ll be surprised by how quickly rewards add up. Your redemption options will vary by credit card.
4. Finance a Big Purchase
Let’s say you need to buy a new refrigerator, but you don’t have enough cash to pay the bill in full. There’s a way to make monthly payments without having to pay interest for a period of time.
You can basically get a short-term, interest-free loan by using a credit card with an introductory 0% purchase annual percentage rate. The introductory period usually ranges from about 12 to 21 months. Your goal is to pay your purchase off before the introductory period ends. For example, if you have a 0% rate for 18 months and your new appliance costs $2,500, your monthly payment is $138.89 (2,500 / 18).
Don’t put other purchases on this card. Pay that balance off while you have a chance to avoid paying interest.
5. Pay Off Credit Card Debt
If you have credit card debt, a balance transfer card can be your new best friend. The terms are similar to the 0% purchase APR credit cards. You get to transfer credit card debt from a high-rate card to a balance transfer card with an introductory 0% APR for 12 to 21 months.
There’s usually a transfer fee, which averages around 3%. But even with the fee, you’re likely to save so much on interest, it will be worth it.
It’s important to restrain yourself from using your balance transfer card for new purchases. People often get in worse debt if they increase the balance they have to pay off.
[Read: Best Student Credit Cards.]
How to Use a Credit Card Properly
Before you start using credit cards, there are a few rules you need to keep in mind. As long as you follow these tips, you’ll have a long and prosperous relationship with your credit card. And it all starts with choosing the right credit card.
Choose the Right Credit Card
Selecting the right credit cards takes a little research, but the time you spend will be worth it. The type of credit card you need depends on your situation. Take a look at this brief rundown on the types of credit cards, and you’ll see what I mean.
Secured credit card. This is a good choice for people who are new to credit or who are rebuilding their credit history. You do have to make a bank deposit to “secure” the card, but the credit card you receive looks just like an unsecured credit card.
Secured credit cards tend to have higher APRs and fees, but there are some excellent secured credit cards that will help you establish credit. Once you prove you can use a secured credit card responsibly, you’ll be eligible for an unsecured credit card that will come with better terms.
Student credit card. If you’re enrolled in college, you might qualify for a student credit card. The credit requirements are looser for a student credit card since it’s designed for someone who is new to credit. However, if you’re younger than 21, the Credit CARD Act of 2009 states that you must be able to prove you have sufficient income to repay debts.
Plain vanilla credit card. This is a credit card that doesn’t offer rewards. Since it’s a no-frills card, it usually doesn’t have an annual fee. This type of card is often a good way to stick your toe in the credit waters without having to keep track of rewards.
Rewards credit cards. This category covers cards with general across-the-board rewards, category rewards, travel rewards, airline miles, cash back and much more. These cards usually require a good credit track record, so it might not be the card you start out with.
When you do feel ready for a rewards card, review the expenses in your budget. If you spend a lot in one area, consider a credit card that offers rewards in that area.
For example, let’s say your gas expenses total $200 a month. You might decide to get a credit card with gas rewards. And your budget for the card is $200. Since you’re tracking your expenses, you’ll know if you are in danger of exceeding the limit. Some credit cards allow you to use your rewards as a statement credit, which helps you pay down your balance.
Read the Fine Print
No one likes to read the disclosure statements, but it’s required reading if you want to use credit cards. Pay close attention to the Schumer box, which displays rates and fees, such as the APRs (purchase, balance transfer and cash advance), the grace period, annual fees, foreign transaction fees, and any balance transfer and cash advance fees.
You can find this on the card’s homepage by clicking on a link labeled “Rates & Fees,” “Pricing & Terms,” or similar wording. Sometimes, the link takes you to a new page, but there are also issuers who place this data at the bottom of the homepage. In other words, it might take effort to find it, but you really need to read it.
One of the most important pieces of information is the length of the grace period. This is the period of time you have to pay your balance off without paying interest. It’s usually between 21 and 25 days. Do not get a credit card that has no grace period. And yes, they do exist!
Pay Off the Balance Every Month
If you use a credit card responsibly, you won’t have to pay interest. This is why it’s so important to track your expenses and avoid overspending. If you carry a balance from month to month, you’ll pay compound interest on your purchases.
If you make that a habit, you’ll end up in credit card debt. Don’t let that happen!
[READ: Best Credit Cards for No Credit.]
Make Payments on Time
This is a big one. Payment history is 35% of your FICO score. If you want a very good credit score, pay all of your bills on time. Set up email and text reminders when bills are due. It’s also a good idea to set up automatic payments, but only if you’re sure the account you link to will have sufficient funds.
If you make a late payment, you might be charged a late fee. As soon as you realize you missed a payment, call your issuer and explain what happened. If you let your payment become more than 60 days late, your lender may report your account to the credit bureaus. When this happens, your score drops a lot. It also stays on your credit report for seven years.
Check Credit Card Accounts Online
There are two reasons you need to monitor your accounts frequently. The first reason is to make a concrete connection with your credit card purchases. It’s easy to have a disconnect with financial reality when you aren’t handling cash. So when you see the transactions online, it reinforces the fact that you’ve spent money.
The second reason is to look for fraud. Make sure you look for purchases you didn’t make. Sometimes, a fraudster will use the account for a purchase under $10, so be sure you look at all the transactions. If you do see something suspicious, follow the steps outlined by the Federal Trade Commission for reporting fraud.
It’s also a smart idea to check your annual credit reports. You’re entitled to a free annual credit report from each of the three major credit bureaus: Equifax, Experian and TransUnion. Review these reports to look for errors or for any accounts you didn’t open. Sometimes, a thief opens a new account in your name, and checking your credit report is the best way to uncover it.
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5 Best Ways to Use a Credit Card originally appeared on usnews.com
Update 09/06/23: This story was published at an earlier date and has been updated with new information.
