Use your credit cards wisely

Many people may regularly use a credit card without realizing or understanding all of its perks and pitfalls. But by learning how to use a credit card wisely, cardholders can pay with convenience, build up their credit score, earn rewards and safeguard their credit from fraud — while not damaging their credit rating or creeping into debt. 

A credit card can either be a smart spending tool to build good credit and earn rewards — or a way to borrow and spend money you don’t necessarily have. Credit cards can help you get by when money is tight, give you the means to purchase something big you pay off over time and possibly land you in debt. With credit, there are pros and cons, but if you know how to use a credit card with discipline and knowledge, you can benefit from its perks. 

Let’s walk through opening, understanding and using a credit card, starting with choosing the best one for you. Whether you’re a beginner or seasoned credit card user, the following information can help ensure you’re using it responsibly and to your advantage. 

Choosing the right card 

There are hundreds of credit cards to choose from — and it’s up to you to choose the right card based on its fees, interest rates, perks, rewards and purpose. Many people choose to open multiple credit cards to meet various needs and goals. 

Which credit cards are right for you? 

Basic: 

A standard or “plain vanilla” card doesn’t have all the frills. You may not get the rewards and benefits that come with other cards, but these cards typically have little to no annual fees and usually offer great introductory interest rates. 

Credit-building: 

Those who need to build or repair their credit may want to choose one of the following cards, which can also help a cardholder qualify for more exclusive or rewarding cards in the future. 

• A  secured card requires a security deposit, which becomes your credit limit. Should you miss payments, the issuer can cover the purchases by dipping into your deposit. You can eventually get your deposit back if you pay your balance off and close the account. 
• In contrast to a secured card, an  unsecured card doesn’t require collateral and is the most common type of credit card. For unsecured cards, approval and interest rates depend on your credit score and history. 
• A student card  helps young adults build credit history. Approval for these cards can be easier to get but student cards typically have lower credit limits and tend to have higher interest rates. Some student cards might be secured cards that require a cash deposit as collateral. 

Paying off debt: 

Balance transfer cards could serve as a debt consolidation solution. The benefit is that they often offer a low or 0% introductory rate that applies to both purchases and balance transfers. Try to pay off as much as you can during this period before the regular interest rate kicks in. 

Earn rewards: 

With rewards cards, you can earn a sign-up bonus, travel miles and perks, rewards in certain spending categories, and points that can be redeemed for cash back, merchandise, gift cards and more. 

Charge cards: 

Charge cards require you to pay off your balance every month, which helps encourage responsible borrowing. These also do not have a predetermined spending limit and interest charges. 

Retail: 

Store-branded credit cards (also referred to as limited purpose cards) may offer discounts on purchases, free shipping, special financing, points and other benefits. 

Business: 

Business cards are exactly what they suggest — a credit card specifically used for business purchases and expenses. This way, you can separate your business expenses from your personal. 

Low-interest cards: 

Low-interest cards are useful for big purchases that you need to pay off over time. Take advantage of a low or zero introductory APR (aka interest) if you need to carry a balance. 

The cost of credit 

There are two costs associated with credit cards in particular to be aware of: fees and interest rates. Make sure you understand the fees associated with using the different features of a credit card, such as balance transfer, cash advance, late or annual fees. Cards with a high annual fee tend to offer bigger benefits, so you’ll want to determine if the annual fee is worth paying to get the better perks. In most cases, you’re charged with interest in exchange for borrowing money. It’s common for the interest rate associated with a balance transfer to adjust to a rate that may be higher than the interest rate for purchases — which is why it’s important to pay off the transferred amount within the promotional period. 

Your credit card is one tool for building, repairing or increasing your credit score. If you pay off your balance on time each month or pay more than the minimum, keep your credit utilization below 30% and develop a good credit history, you’re establishing a healthy credit score. 

Helping or hurting your credit score 

A good credit score plays a big role in your financial life and goals, such as getting a loan approved, lower interest rates and finance charges, higher borrowing limits, a better auto insurance rate and approval for apartments and rentals. This score informs lenders on how well or poorly you manage debt, which impacts your approval and interest rate. 

If you abuse your credit card, you could be hurting your credit score. Skipping or making late payments, maxing out your card, incurring a high outstanding balance and closing an account can all have the potential to negatively impact your score. If you prefer to use your debit card, you’ll still need to establish a history of good credit, which you can do by using a credit card for purchases here and there and paying it off at the month’s end. 

The risk of accruing credit card debt 

As much as we’d like, a credit card isn’t a magic wand that you can wave to buy whatever you like whenever you want. Giving yourself that kind of permission may likely put you on a road toward debt, which happens when you can’t afford to pay off your outstanding balances that accumulate with interest monthly. Keep these tips in mind to help prevent you from racking up credit card debt. 

• Don’t miss payments and pay the balance in full each month (or at least pay more than the minimum balance). 
• Adjust your spending habits as soon as you notice it’s becoming harder to make your monthly payments. 
• Be realistic with your purchases. Rationalizing your overspending is a red flag for debt. 
• Build up your savings, so you don’t have to rely on a credit card when money is tight. 
• Maintain a low credit utilization ratio (the amount of credit you’re using vs. the total amount available to you).
• Try not to carry a balance for too long which will increase due to interest.
• Prepare for a large purchase, rather than charging it to your card.
• Don’t be fooled by keeping a low balance on multiple credit cards. This only gives the illusion that your spending is within reason.
• Be mindful of debt denial, which can happen when you only focus on making the minimum payment while ignoring the overall balance or remaining limit. 

Credit card fraud and safety 

Debt isn’t the only risk of using a credit card. Credit card fraud happens when someone steals your card or obtains your card information to make fraudulent purchases. Your personal information could also be stolen and used to apply for a credit card in your name. There are various types of credit card scams to know about to help prevent you from financial loss or identity theft. 

A best practice is to regularly monitor your account and statements for any unauthorized charges. In most cases, victims have zero liability — just remember to report the theft immediately. Sign up for alerts of fraud or charges made and check your credit report at least once every 12 months to see if any cards were opened in your name. Also, never give your credit card info to someone you don’t trust. 

Using a credit card can either help or harm your spending and finances. Credit cards can earn you rewards, repair or improve your credit score, build credit history and provide fraud protection. Credit cards aren’t necessarily good or bad by nature — it’s how you use them that determines if they positively or negatively affect your finances.