Like getting your driver’s license or starting college, opening a credit card signifies a milestone of adulthood. You can find a vast array of choices in credit cards for college students, those new to managing credit, or those rebuilding their credit. But once that plastic is in your hands use it responsibly to build credit.
Having a credit card opens new financial doors. They make it easier to rent a car, pay for a hotel room without pre-authorization holds placed on your bank account, and cover emergency expenses, which ideally won’t happen, but it’s good to have one just in case. The right credit card can also deliver rewards like cash back, gift cards, and travel discounts.
Plus, with responsible credit card use, your credit score rises. And a high credit score leads to lower interest rates on things like car loans and a mortgage.
How to Use a Credit Card Responsibly
From the time you activate your card, you’re gaining access to untapped funds. But borrowing this money comes at a price. That price is the interest rate.
Before you get set to swipe or dip for your first purchase, think about your overall financial situation, monthly budget, and the best way to use your credit card to build credit without going into debt.
1. Understand Your Credit Card Terms & Conditions
Before you start using your credit card, read the terms and conditions that came with it. Take note of these numbers:
- Credit limit (how much you can borrow on your credit card)
- Interest rate (the price you pay to borrow that money)
- Grace period (how many days you have each cycle before you pay interest)
- Late fees (penalty charges if you pay your bill late)
- Over-limit fees (additional charges if you exceed your credit limit)
- Penalty APR (a new, higher interest rate if you pay your bill late)
- Cash-advance fees (for withdrawing cash from an ATM using your credit card)
- Due date
Reviewing the interest rate, late penalties, and fees, gives you incentive to make a plan to pay your bill in full every month. By law, your credit card statement must show how much you will pay over time if you don’t pay your bill in full each month. Just a glimpse at that chart can cause an eye-opening revelation, offering incentive to charge only what you can afford to pay off.
2. Create a Budget & Stick to It
It’s tempting to max out your credit card each month and worry about paying the bill when it comes due. Instead, calculate your monthly budget to determine where and how you’ll use your credit card.
Maybe you will pay for groceries on your card to rack up rewards points. If you have a grocery budget of $400 per month, don’t charge more than that amount.
If you get into a situation where you need to use your card for an emergency and have to pay it off over time, recalculate your budget with that new monthly credit card payment in mind.
3. Pay Your Credit Card Balance in Full & on Time
Your credit score drops when you open a new credit card account. That’s because of a hard inquiry in your credit file. A new card also reduces the average age of accounts, which is another factor in your credit score.
New accounts also represent a credit risk because people might forget to pay the bill. Establish automatic payments immediately so you don’t miss a payment and hurt your credit score just as you’re trying to build credit.
To avoid interest charges, pay the balance in full each month. That should be easy to do if you’ve been smart about budgeting for credit card payments.
4. Minimize Your Credit Card Utilization
Your credit utilization ratio, the percentage of available credit you’re actually using, factors heavily into your credit score. Aim to use no more than 30% of your credit limit each month.
For example, if you have a credit card with a $5,000 limit, your goal limit to manage your credit utilization ratio is a max of $1,500. Once you’ve charged that much, don’t charge more until you’ve paid it down. Ideally, don’t charge more than you can pay off in full each month.
5. Avoid Cash Advances & High-Fee Transactions
Having a credit card can save you in a true emergency. But avoid using it if it’s going to cause you to pay high fees. For instance, paying federal taxes with a credit card comes with fees of up to 1.98% of your total tax bill on top of any fees and interest charges your credit card company imposes.
Cash advances also have high fees. Most cash-advance fees equal the greater of 5% of the advance amount or $10. So if you take out a cash advance of $500, it costs $25 plus interest if you don’t pay your bill in full when it’s due.
Balance transfers also come with high costs, typically 3% to 5% of the transfer amount. However, if you’re transferring a balance to a 0%-interest credit card to pay down debt faster, those added fees could be worthwhile.
But read the fine print so you know what you’re getting into with a balance-transfer credit card. For example, if you make one late payment, your interest rate could skyrocket.
6. Regularly Review Your Credit Card Statements
Most credit card apps make it easy to set up push notifications to warn you of potential fraud. But it’s easy to miss a text message or email. Take an active role in fraud protection by reviewing your credit card statements each month and verifying transactions.
If you spot any discrepancies or unauthorized charges, report them to your credit card company immediately. Use the app to turn off your credit card while the credit card company investigates the questionable charges.
Use a free app like Evernote Scannable to save credit card receipts, and cross-reference those reports against your credit card statement.
7. Monitor Your Credit Score
Monitor your credit reports from each of the three credit bureaus — Experian, TransUnion, and Equifax — to spot and correct errors promptly.
Many credit card companies, including Capital One, Chase, and Discover, offer free credit monitoring when you open a card. These services help you track overall trends in your credit score or spot negative marks on your credit reports that could be driving your score down.
But these services usually don’t track your FICO 8 score, which is the credit score most lenders use to determine creditworthiness. If you’re applying for new credit or a loan, use MyFico.com.
8. Use Credit Card Rewards Wisely
Once you’ve started building credit, you’ll get offers for rewards credit cards. But earning rewards for your purchases makes it that much more tempting to justify racking up debt. If you lose track of your budget, the interest will negate those rewards.
To make the most of your rewards card, always pay your bill on time. It also helps to understand how much points are worth, how you can earn bonus points, and how to redeem points for the greatest value.
I use an easy-to-read Excel spreadsheet to track the best way to redeem points for each card, and also to remember each card’s bonus categories. For those who lean heavily on their phones, freemium apps like MaxRewards and AwardWallet serve a similar function. Tracking is especially helpful for cards like Chase Freedom and Discover it, with bonus categories that rotate quarterly.
Building or rebuilding credit can be a rewarding experience in more ways than one. Responsible credit use leads to a higher credit score, which can yield lower loan rates, nicer places to live, better jobs, and a path to financial freedom and security.
Today’s cards also come with many benefits, including purchase and price protection, which comes in handy when buying electronics or big-ticket items. Review the benefits of each card in your wallet so you can always choose the best one.
On the other hand, credit card debt can make you a prisoner to high interest rates. Knowing how and when to use credit, when to take on more credit, and when to avoid your cards can help you create a stable financial future.