Credit cards can help you get ahead, but only if you know the right way to use them.
Using a credit card makes shopping and paying bills infinitely more convenient than cash or a check. Paying with credit can simplify the purchasing process. It also compiles all your spending into a single bill each month so you can make just one payment to cover all your spending.
Credit cards also offer something you often don’t get with other forms of payment — rewards for spending money. These rewards can come in the form of cash back, miles or flexible points.
But you won’t end up financially better off if you fail to use your credit card responsibly. Here are some tips for getting the most out of your credit card — and some pitfalls to avoid.
The golden rule of credit card spending
Before you get a credit card and try to earn rewards, know that today’s surging interest rates make for an unfriendly environment for carrying a balance. The average credit card APR is currently over 20%. Carrying a balance will incur interest charges that can quickly wipe away any value you’d get from a card’s rewards. This can also lead you into credit card debt — a cycle that can be difficult to get out of.
Other things can go wrong with a credit card too, and some of the worst mishaps can take years to fix. For example, a late payment on your credit card can not only result in being hit with a late fee and a penalty interest rate, but it can also damage your credit score.
If you want to benefit from credit cards without falling behind on bills or getting in over your head, here’s a rundown of all the things you should do once you start using a credit card for spending.
1. Know your credit card’s terms
Make sure you read over the fine print and terms for any credit card you plan to apply for, including information like the regular variable APR, any credit card fees and how you earn rewards.
If your card comes with an intro APR offer that lasts for a limited time, make sure you know when it expires and the interest rate you’ll be charged once it does.
2. Pay all your bills on time
Because your payment history is the most important factor that makes up both FICO and VantageScore credit scores, aim to always pay your credit card bill on time. Not only does paying bills early help you build your credit score, but it helps you avoid late fees and penalty interest rates.
If you can, we recommend paying your bill in full each month too, so you won’t carry a balance and accrue interest.
3. Regularly check your credit card account
Reviewing your credit card account history regularly can help you track your spending. Most major credit card issuers make it easy to track your purchases in your online account or through a mobile app.
4. Maintain a low credit utilization ratio
The second most important factor that makes up your FICO score is the amount of debt you owe in relation to your credit limits. This is called your credit utilization ratio. A high credit utilization ratio may signal to creditors that you may not be able to keep up with your bills in the future. Experts recommend keeping your credit utilization ratio below 30%.
For example, if you have $1,000 available in credit, you’ll want to keep your balance under $300.
5. Take advantage of credit card rewards
If your credit card earns rewards, make sure you can take advantage of them before applying. We recommend choosing a credit card with rewards that suit your regular spending. That might mean having more than one credit card — one for dining out, grocery shopping and gas, and one that earns a competitive rate on everything else. Make sure you have the budget to support multiple cards and the financial know-how to get the most from each.
Rewards credit cards come in many different forms, with some offering travel-specific rewards and others offering cash back. Ideally, you’ll pick a rewards credit card that offers rewards in categories you spend the most in. If it comes with a welcome offer, be sure not to overspend to reach it.
5 things you should never do with your credit card
Here are a number of common credit card pitfalls you should avoid in order to get the most from your credit cards.
1. Don’t spend more than you have
Your credit limit is how much money you can borrow from your credit card issuer at any time, but that doesn’t mean you should get close to reaching it.
To get the most from credit cards, use them like debit cards — that means not spending money you don’t have. If you carry a balance, costly interest charges could eat away at your finances. You can even pay your credit card weekly instead of monthly to make this easier to manage.
2. Don’t pay only the minimum payment
Paying the minimum payment on your credit card bill will keep your account in good standing — but it can dig you quickly into debt. You’ll start accruing interest on the unpaid balance, and if you carry that monthly, you could find a few simple purchases costing you much more in the long run.
Let’s say you charge $5,000 to a card with a 20% APR, and you only pay the minimum payment until it’s paid off. Your minimum payment would start at $133.33, and then decrease each month as your balance decreases. At this rate, it will take you 277 months to pay it down and cost you $7,723.49 in interest. That means your $5,000 balance would grow to $12,723.49 and take nearly 23 years to pay down.
But by paying a little extra, like $150 every month, you’ll be able to knock out your debt faster, while saving over $5,000 in interest.
3. Don’t apply for multiple cards simultaneously
New credit is another factor that impacts your FICO score. To avoid scoring poorly in this category, you should never apply for multiple cards at the same time. Instead, try to space out credit card applications by several months or even longer if you can.
Applying for new credit accounts also results in a hard credit check. Hard credit checks will usually lower your credit score by a few points temporarily, so you’ll want to stagger them.
4. Don’t ignore your credit card statements
Credit card bills may not be your favorite type of mail, but ignoring your statements can make it harder to track your spending and stick to your budget. Missing a payment also means late fees, penalty interest rates and damage to your credit that won’t be easy to fix.
5. Don’t close old credit cards without a good reason
The average length of your credit history makes up 15% of your FICO credit score. This category considers how long all of your accounts have been open, and you can get a leg up by keeping old accounts open — even if you’re not using them.
Closing a credit card account will also increase your credit utilization ratio by lowering your total available credit. Unless the credit card charges an annual fee or is tempting you to overspend, it’s usually best to keep it open.
Tips to improve credit card spending habits
To avoid the pitfalls of credit cards, have a plan in place:
- Create a monthly budget. Whether you write out a budget on your own or use a budgeting app, you need to know where your money is going each month so your financial goals stay on track.
- Keep an eye on your credit card spending. Since your credit card bill hits your bank account monthly, it’s important to check in more frequently to ensure your credit card spending is on track. Keeping a close eye on your credit card account can help you avoid overspending in discretionary categories like dining out and entertainment or charging purchases you can’t pay off immediately.
- Only use credit cards for planned purchases. Use your card for groceries, gas, utility bills and insurance payments you’ve built into your budget, instead of splurge purchases you didn’t plan.
- Set up automatic payments. If you’re worried about accidentally missing a payment, setting up automatic payments can alleviate this stress.
The bottom line
Credit cards can be a valuable tool if used wisely, but they can also lead you into a lifetime of crushing credit card debt.
Create a budget and stick to it. Once you’re in the habit of paying your credit card off in full each month, you can focus on earning and maximizing rewards for planned purchases.
