If you’re trying to use a credit card responsibly, you can get started by following these basic principles:
- Ease in slowly
- Know your spending limits
- Pay more than your minimum
- Never pay late
- Keep your credit utilization low
- Keep a close eye on your statements
In the below guide, we’ll take a deep dive into each one of these so you can feel more confident using your credit card in a responsible manner.
When you first open a credit card account, here’s a tip: ease in slowly.
The trick is to not make huge purchases right away, but rather decide on one thing you will use it for, and then pay that amount off each month.
An example of this might be one subscription or a small bill that you already normally pay, like an auto draft for your monthly gym membership or your cell phone bill.
The key is to keep it at a low amount that’s affordable for you to pay off during the grace period so you don’t get in a bind, and commit for six months to put nothing else on the card.
This is an exercise to help you develop good habits of staying within your credit limit and paying it off responsibly, and it will also help you get regular credit line increases, which will boost your score by adding to your credit utilization percentage.
After your six months are up and you have proven to yourself you can use your credit responsibly, you can work your way up to bigger purchases.
But, it might be a good idea to still put limits on exactly what you allow yourself to charge.
For example, if you travel frequently, you might choose to only use your credit card for charges related to your trips.
Remember: always be careful not to go over your limit—this can not only hurt your credit, but it can also cause you to incur extra fees.
Know your spending limits
While it’s smart to keep track of your credit limit, you also need to set spending limits for yourself that keep you within your budget.
Once you’ve developed good habits and are able to stick with them, you should be able to gradually give yourself leeway: you can start charging a little more than just what you can pay off in a month, just remember not to go crazy, and don’t do it all the time.
You and your partner are the only ones who know what you can handle financially, and there may be a big trip you’ve agreed to put on your credit card, or maybe you have a looming home repair that needs to be addressed urgently.
These instances should take careful planning and be the exception rather than the rule.
But in most cases, it’s best to set a spending limit for yourself within your monthly budget.
For example, say you can safely pay $100 a month on your credit card—you might then set a spending limit of $200 on your credit card.
This way, you know you can safely pay it off in two months without causing you any strain.
Pay more than your minimum
Every credit card has a grace period, a window of time when you can pay off your charges without accruing any interest.
That’s not to say you can’t ever keep charges on your card for more than a month, it’s just a good idea to make more than your minimum payment.
If you only make your minimum payments every month, you could start to accrue massive amounts of interest.
Based on the average household revolving credit card balance of $6,081, you could end up paying more than $4,000 in interest by just making your minimum payments.
But if you added $100 a month to that minimum, the interest you’d pay would be reduced to $1,409!
Never pay late
Payment history accounts for 35% of your credit score, which means that it’s the highest factor used to calculate your score.
What does that mean for you?
It means that one late payment can do some pretty hefty damage to your credit score*.
Just one late payment can drop a high credit score by up to 110 points, and someone with a low score can see a drop of up to 80 points.
So, no matter what else you do, always pay at least your minimum balance on time every single month.
*Note: credit card companies cannot report your payment as late until it is 30 days past the due date. So, your score shouldn’t change at all as long as you get it in by then. Do keep in mind, however, that that doesn’t prevent them from tacking late fees onto your bill.
Keep your credit utilization low
Your “credit utilization“—or, how much of your available credit you’re currently using—accounts for 30% of your credit score, making it the second highest factor used in the calculation.
But if you max out these lines of credit, it lowers your score, making creditors view you as a high-risk borrower.
So, use your credit cards responsibly and keep them as much under the limit as possible at all times.
Most credit experts recommend keeping your credit utilization at 30%.
What this means in plain English is if you have a $10,000 line of credit on your credit cards, to keep your balances at $3,000 or lower.
Keep a close eye out on your statements
It’s definitely best practice to monitor your credit statements and activity closely, which will help you watch for overspending or reporting errors.
But aside from that, it’s important to keep an eye out for fraud and identity theft.
The Identity Theft Resource Center (ITRC) reported at the end of 2018 that there was a “126% increase in exposed consumer data,” which means consumer information is a prime target for credit fraud and identity theft.
The best way to combat this is to closely monitor and review your own credit reports and statements so you can catch fraudulent or erroneous charges quickly.
Immediate action will help you clean up issues like this a whole lot faster than if you are to notice them a year down the road.
How credit cards make money off you
Credit card companies make most of their money from interest.
So, when you don’t pay your balances off in time, or if you keep a revolving balance, they’re the ones who profit.
But they also make a lot of money from fees their cardholders and partnering businesses pay for transactions.
In other words, while credit card companies do want you to pay your balance eventually, you’re certainly not hurting them by keeping a revolving balance.
But, instead of allowing them to make that money off you, there are ways you can actually be the one who benefits. One way is by using rewards cards.
Rewards cards come in many different forms, the most popular that offer airline miles for your spending, but you can also earn other travel rewards or points you can use for shopping.
Benefits of using a credit card
Credit cards can be intimidating if you’ve had bad financial experiences in the past, but credit is definitely important, and using a credit card responsibly has some undeniable benefits.
- Building or re-building credit. Every aspect of your relationship with credit cards gets reported to the credit bureaus, so if you use them responsibly, they’ll only boost your score.
- Points and rewards. Not all credit cards offer points and rewards, especially if you need a guaranteed approval card that approves high-risk borrowers. But if you can find one that offers travel, cash-back, or shopping rewards, you can actually make money rather than spend it.
- Emergencies. Having a credit card you can use for emergencies can give you peace of mind, especially if you’re like a lot of Americans who live paycheck to paycheck.
- Travel. Many hotels and car rental companies require credit cards to reserve their rooms or vehicles. Some of them will take a debit card to make reservations, but want an actual credit card on file in case you incur extra charges.
- Credit monitoring. Many credit card companies offer monitoring services that alert you in the event of suspected fraudulent activity. But even if yours doesn’t, checking your statement every month is a good way to catch most of it.
Credit cards are one of the best tools you can use to build or repair your credit.
Even if you’ve had financial problems before, you can start to raise your score by improving your habits, but this will only work in your favor when you’re ready to use them responsibly.