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How to Use a Credit Card: Best Practices Explained

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Knowing how to use credit cards can help you keep your money where it belongs — in your wallet. You can avoid interest charges, stay out of credit card debt, earn rewards and build your credit score. A strong credit history will help you qualify for better rates on loans and mortgages, saving you thousands of dollars in interest for years to come.

Always handle your credit card responsibly. When you make purchases on credit, you’re 100% liable for paying back everything you charge. If you aren’t careful, you can end up in a lot of debt.

There are four main principles to follow to make the most of your credit cards. If you take away anything from this guide, it should be the first rule: Pay your bill on time every single month. This strategy alone will significantly improve your financial health. If you can afford to pay the bill in full, you should also do that.

Rule No. 1: Always pay your bill on time

Paying your bill on time and in full will help you avoid interest charges, late fees and poor credit scores. If you can’t afford to pay your bill in full right away, make sure you at least make the minimum payment on time.

Key terms to help you understand your credit card statement:

  • The closing date is the last day you can make a charge for that particular statement. After the closing date, any new transaction will go onto next month’s statement.
  • The payment date or due date tells you when the payment for a particular statement is due.
  • The minimum payment is the amount you’ll need to pay before the payment date in order to avoid consequences like late fees and a dip in your credit score. While your account will remain in good standing if you only pay the minimum, any remaining balance will start to accrue interest.
  • The statement balance is how much you owe in total as of the closing date.
  • The grace period is the time between the closing date and the payment date. You won’t be charged interest on your statement balance during this time as long as you pay your balance in full. After the grace period, any remaining balance will accrue interest, and new charges will start accruing interest immediately.
  • Your credit limit is the total amount you can charge to your card at one time. Once you hit the limit, you’ll need to start making payments in order to charge more to your card.

In general, the best practice is to pay your entire statement balance every month before the payment date. All credit cards are different and will have varying billing cycles, payment dates and grace periods. If you’re having trouble remembering to pay your bill, most issuers will allow you to set up automatic payments or schedule reminders each month.

The consequences of missing a payment

By consistently missing payments, you could end up paying thousands of dollars in late fees and interest. The negative consequences compound — once your credit score takes a hit, you’ll face higher interest rates when you apply for future mortgages or loans. If you’re unable to pay your bill on time, it may be time to take a break from your credit cards for a while.

Rule No. 2: Keep your balance low

In addition to making on-time payments, it’s essential to keep your balance low relative to your available credit limit. There are two main benefits to maintaining a small balance:

  1. Low balances help increase your credit score.
  2. You’re more likely to pay off your balance in full and on time when you have a low balance.

Many factors determine your credit score, but a significant portion (30%) comes from your credit utilization ratio. This is the ratio of what you owe to your total credit limit. For instance, if you have a credit limit of $1,000 and charge $500 to your card, your credit utilization would be 50%.

Pro tip: Keep your credit utilization ratio under 30%. Anything higher can decrease your credit score. To keep your credit utilization low, charge less on your card than what you can currently cover with your bank account. Viewing your credit card as an extension of your budget can lead to credit card debt if you lose your job or run into an emergency.

Rule No. 3: Understand how interest is calculated

If your credit card is currently paid off in full, you won’t start accruing interest unless all or part of your upcoming full payment is late, which is typically three weeks after you receive your statement. 

Once you start accruing interest, most credit card issuers calculate interest based on your average daily balance, starting with the first day your payment was late, up until your entire balance is paid off. They’ll then multiply it by your card’s APR (annual percentage rate) and the number of days in the billing cycle and divide this number by 365.

Monthly interest charge: (Average daily balance x APR) x (Number of days in billing cycle) ÷ 365 days

For example, if you have a statement balance of $1,000 and make a payment of $800 on the due date, you’ll be charged interest on the remaining balance of $200 and lose your grace period for future transactions. In the new billing cycle, any transactions will begin accruing interest immediately. You’ll only get the interest-free grace period back if you pay your balance in full by the payment date.

Rule No. 4: Monitor your monthly statement

Monitoring your statement helps you check for fraud, stay on a budget and maintain a low balance. Even if you’ve set up automatic payments, it’s still wise to log in and check your statement every month to ensure there are no suspicious transactions.

In addition to checking for fraudulent activity, monitoring your statement will help you stay on budget. There’s no way to know if you’re maintaining a low balance, keeping your spending in check or blowing the budget unless you’re regularly checking in.

Credit cards are one of the best tools for building a strong credit score and can lay a great foundation for your credit history. You can use credit cards to build credit by following the recommendations above: Pay on time and in full, and keep a low balance.

Know how your credit score is calculated

The FICO Score is the credit score that most lenders use when deciding whether to offer you a credit card, loan or mortgage. Your FICO score has five key components that each make up a percentage of your total score:

  • Payment history (35%) is the biggest factor, and is determined by how often you pay on time. This tells lenders how reliable you are as a borrower.
  • Credit utilization (30%) is the ratio of the amount you borrow (your balance) to the amount that is available to you (your credit limit).
  • Length of credit history (15%) is how long you’ve used credit — the longer, the better.
  • New credit (10%) is how often you apply for credit products or loans, and what percentage of your credit comes from recently opened accounts.
  • Credit mix (10%) is how many different types of credit you use.

FICO Scores range from 300 to 850. It takes time and patience to build your credit score. Since how long you’ve used credit determines 15% of your score, it’s a good idea to start early and learn how to manage your credit properly.

Never miss a payment

35% of your FICO score is determined by your payment history. Paying your cards off on time is the single most important step to build your credit.

Maintain a low balance

The amount you owe determines 30% of your FICO score, so maintaining a low balance will help you improve your score.

Never cancel your first credit card

Unless it has an annual fee, keep your oldest line of credit as long as possible. This will increase your average account age.

Ask for a credit limit increase but don’t increase your spending

Call your credit card company and ask for a credit limit increase. If your credit limit goes up but your spending stays the same, your credit utilization will go down. This will help keep your credit utilization score below the recommended 30%.

Open a no-fee credit card and set a recurring bill and automatic payment to that card

Set up a small recurring payment for a streaming subscription or another fixed monthly cost, and don’t use the card for anything else. That will help both your overall utilization and your payment history. If you choose a card with no fee, you’ll be able to keep the credit card open for a long time and eventually increase your average account age as well.

Looking for a low-cost credit card? See our picks for the best credit cards with no annual fee.

Pay off your credit cards a few days before each statement closes

Paying off your cards before the statement closes will decrease your overall utilization, which should help boost your credit score for a few days. Paying your credit card bill early — but after the statement has closed — can also sometimes help reduce your utilization.

Earning rewards from a credit card is the fun part. But first, you should consider what your top spending categories are, then pick a card that will provide the best returns for you. Everyone’s spending habits are different — some people may spend a lot on travel, while others only spend on groceries or takeout.

Look at your spending habits

Take a look at the past few months of your spending and categorize your charges as best as you can. Before choosing a card, consider if your spending is concentrated in one or more of the following categories:

Get points for free
If you’re getting reimbursed by your company for work-related purchases, make sure those purchases go on a card that gives you cash back or other rewards.

Once you figure out which categories you’re spending the most in, start researching different rewards credit cards that fit your needs. You may find that you want to use two or more credit cards to maximize rewards. However, while juggling cards can help you earn more rewards, don’t get so distracted that you end up spending more than you usually would.

Understand cash back vs. points vs. miles

Next, you should consider which types of rewards you’re looking for. There are two main types of rewards:

  • Cash back credit cards give you cash back rewards on your purchases in the form of statement credits, direct deposits or gift cards.
  • Travel credit cards give you rewards in the form of points or miles that you can redeem for flights, hotel stays and more.

Credit card rewards can be confusing, and most credit cards have restrictions on how you can redeem the rewards. For example, some cards require a minimum redemption threshold, or you may have to wait multiple billing cycles to receive your rewards. Consider how much time and effort you want to put in and whether you’d prefer a simple card with straightforward rewards.

Below, we’ve hand-picked our favorite beginner rewards credit cards that are easy to use and offer excellent returns:

CardBest for...Annual feeRewards rate
Chase Sapphire Preferred® CardTravel rewards$95Enjoy benefits such as 5x on travel purchased through Chase Travel℠, 3x on dining, select streaming services and online groceries, 2x on all other travel purchases, 1x on all other purchases, $50 Annual Chase Travel Hotel Credit, plus more.
Citi Double Cash® CardCash back$0Earn 2% on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases. To earn cash back, pay at least the minimum due on time. Plus, for a limited time, earn 5% total cash back on hotel, car rentals and attractions booked on the Citi Travel℠ portal through 12/31/24..
Chase Freedom Flex℠ CardRotating categories$05% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate. Enjoy new 5% categories each quarter. Plus, earn 5% cash back on travel purchased through Chase Ultimate Rewards®, 3% on dining and drugstores, and 1% on all other purchases.

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