Let me guess: You’ve heard personal finance experts and influencers say that credit cards are bad and that you should cut yours up immediately.
Yep, we’ve all read those warnings. And many of us have probably wondered if they were right and maybe even felt guilty for swiping our credit cards on the regular.
If this is the only type of personal finance expert you’ve been following, then you’ll probably be surprised to see me say that I love credit cards.
While it’s true that credit cards have high interest rates and have caused many Americans to go into debt, when used correctly, they’re an incredible tool. In fact, not only do most credit cards not have to cost you a dime, but you can even make money by using credit cards.
If you’re going to add credit cards to your personal finance toolbox, then it’s important to understand how to use them responsibly and in a way that really benefits you (and not the credit card issuers).
The problem with credit cards
Before we talk about how to use credit cards responsibly, we should first acknowledge some of the problems with credit cards and why some people seem to have such strong feelings about them.
One of the biggest problems with credit cards is the amount of money they cost consumers in interest each year. When you carry a balance on your credit card (meaning you don’t pay off the full balance each month), you’ll pay interest on that amount.
Unfortunately, the average credit card interest rate at the beginning of 2022 was 16.13%. That number is only going to rise as interest rates do. And because the average credit card balance is $5,525, many Americans end up paying an awful lot of interest each year.
Credit card interest, more than any other kind, can hold you back from reaching your financial goals. Not only are the interest rates notoriously high, but that interest compounds daily, meaning the interest that accrued is added to your credit card principal and also begins to accrue interest.
So why have so many people managed to accrue large amounts of credit card debt? There are three primary reasons I can pinpoint:
- People spend money they don’t have. Rather than spending money that’s already in their bank account, they spend money they haven’t earned yet. Then they pay those purchases off in the future when they get paid.
- People lose control of their spending. Swiping a credit card is painfully easy sometimes, especially if you’re struggling with emotional spending.
- People use credit cards as an emergency fund. When financial emergencies pop up and you don’t have an emergency fund in place, a credit card may be the only option.
Unfortunately, all of these factors result in people getting into financial trouble with credit cards, which is why some financial experts advise so strongly against them. The good news is that if you learn to use them correctly, you can avoid these problems for yourself.
Read More: How to Pay Off Credit Card Debt Fast
The benefit of credit cards
Before I dive into tips for using credit cards responsibly, let’s talk about a few benefits of using credit cards.
One of the biggest advantages to using credit cards is how they can help you build your credit history and credit score. Now, some personal finance experts (*cough* Dave Ramsey *cough*) will tell you that a credit score is unnecessary because it only encourages the use of more debt.
This couldn’t be further from the truth.
First, there are some situations where debt is simply unaffordable. For example, most people I know can’t afford to buy a home in cash. In that case, a good credit score is vital.
But even if you’re not taking on more debt, a credit score is important. Landlords can run your credit to decide whether to rent you an apartment. Insurance companies use your credit score to set your insurance premiums. Even employers can use your credit score when deciding whether to offer you a job.
So yes, a credit score is important.
The best way to build your credit using credit cards is to use your cards each month but use less than 30% of your balance. If you use more than 30% throughout the month, then you can pay your balance weekly instead of monthly to keep your running balance lower.
The other step to building credit with credit cards is to pay your balance off in full each month. Doing so will show lenders and credit bureaus that you can use debt responsibly. Plus, it will help you avoid those costly interest charges we talked about earlier.
Read More: 7 Hacks to Boost Your Credit Score Quickly
My personal favorite perk of using credit cards is the rewards you can earn. Depending on how much you spend on your card and the credit cards you use, you could earn thousands of dollars of rewards and perks each year.
There are a few different ways you can earn rewards on credit cards.
First, many credit cards offer a welcome bonus, where you’ll get a large number of points if you spend a certain amount of money (usually around $3,000) in the first few months of having the card. One of these bonuses alone helped Brandon and me take an almost free trip to an all-inclusive resort in the Dominican Republic.
Another way to earn rewards with a credit card is through your regular spending. Many credit cards offer a certain percentage of either points or cash back on each dollar you spend. You can use those points for statement credits, gift cards, money in your bank account, free travel, and many more.
In addition to these rewards, many premium credit cards offer perks that include hotel and airline statement credits, travel insurance, extended warranties, and many more.
Carrying a credit card is far safer than carrying either cash or a debit card, thanks to the fraud protection they all come with. Basically, you aren’t on the hook for fraudulent purchases made with your credit card.
Technically debit cards also offer this fraud protection, but here’s the problem: When someone fraudulently uses your debit card, the money leaves your bank account. And while you’ll probably eventually get that money back if the purchase was really fraudulent, it could take a while. In the meantime, you’re simply out that money.
But in the case of fraudulent transactions on a credit card, you never have to worry about the money leaving your bank account, and the credit card issuer won’t require you to pay for those charges.
How to use credit cards responsibly
Now that we’ve talked about some of the advantages and disadvantages of using credit cards, it’s time to dive into what we’re really here to talk about: using credit cards responsibly.
1. UNDERSTAND YOUR CREDIT CARD TERMS
First and foremost, it’s important to understand your credit card terms. You can find these by logging into your online account and finding your credit card agreement or another document that shares this information. The details you’ll want to look at include:
- Purchase interest rate
- Balance transfer interest rate
- Annual fee
- Over-limit fee
- Late fee
- Foreign transaction fee
- Statement date
- Payment due date
Once you know your credit card terms, keep them in mind as you use your card. Always pay your bill on time, and proceed with caution anytime you use your card in a way that will require you to pay unwanted interest or fees.
2. ONLY SPEND MONEY YOU HAVE
Here’s how most people use their credit cards: They put expenses on them throughout the month, often for groceries, eating out, and other spending. When they get paid next month, they use a part of that paycheck to pay off their credit card bill.
The problem with using your card that way is that you’re using money you don’t actually have yet. You’re using February’s income to pay for January’s spending rather than using January’s income.
The best way to avoid this problem is to spend only money you already have. If you’re going to spend $100 on groceries and put it on your credit card, that $100 should already be in your bank account to pay off that credit card bill.
The easiest way I’ve found to limit myself to only spending what I have is to get one month ahead on my budget. Click over to the post to learn how!
3. KNOW YOUR CREDIT LIMIT
It’s critical that you know your credit limit for a few different reasons. First, if you spend over your credit limit, you’ll usually be subject to some sort of fee. It’s an expense that could be easily avoided by paying attention to your card balance and spending.
The other reason it’s important to know your credit limit is how it affects your credit score. One of the most important factors when it comes to your credit score is your credit utilization, which is the percentage of your available credit that you use at any given time.
In general, the higher your credit utilization, the worse it is for your credit score. It’s recommended that you keep your utilization below 30%.
When you know your credit limit, it’s easy to ensure your credit utilization is low. Suppose you have a credit limit of $10,000. You’ll know to keep your balance below $3,000 at all times.
If you use your credit card for all of your spending as I do, then you can pay off your card more often to ensure your credit utilization doesn’t get too high. I have a recurring note on my to-do list to pay my credits cards off in full every Monday.
4. PAY YOUR BILLS ON TIME
It probably seems like common sense that using your credit card responsibly includes paying your bill on time. But it bears repeating because the average household pays an average of more than $100 per year in late fees.
The simplest way I’ve found to ensure I never pay a bill late is to set up automatic payments. I have automatic payments set up on every single bill I have, so even if I stopped checking in on my accounts, my bills would get paid.
Another solution for ensuring your bills are paid on time is to create a bill calendar. You can create a digital calendar or a physical calendar and write down the date that each of your bills is due, including your credit card.
Paying your credit card bill on time will help you avoid annoying late fees and will help keep your credit score healthy since one late payment can cause a major ding in your credit (and multiple late payments can do even worse).
5. MONITOR YOUR MONTHLY STATEMENTS
Most of us probably don’t get actual credit card statements in the mail each month. Instead, they’re available on your credit card issuer’s website. But whether you get a physical copy or see them online, it’s worth looking them over at least once per month.
First, looking at your credit card statement at least once per month can help you stay on top of your spending and notice any bad spending habits. It’s easy for overspending to slip through the cracks, but looking at your statements forces you to face it head-on.
The other reason it’s important to check your monthly statements is to make sure there’s nothing there that shouldn’t be there. If there are any fraudulent charges on your credit card, you’ll want to know right away so you can alert your credit card company.
6. PAY YOUR FULL BALANCE
We’ve already talked about how many Americans have fallen into credit card debt, and most of us don’t want to be there. The single best tip for using your credit cards responsibly is to pay your balance off in full each month.
Not only will paying off your full balance help save you money on interest and avoid racking up debt, but it will also help your credit.
Unfortunately, there is a myth floating around out there that carrying a credit card balance actually helps your credit score. That’s simply not true. Sure, it’s important to show your credit card companies you can use debt responsibly — which requires that you actually use your credits. But you’ll get even more benefits if you pay them off in full.
What if you have credit card debt?
You might be reading this post already in credit card debt and wondering how it applies to you. I’ve put together a few more tips specifically for people who already have credit card debt.
AVOID RACKING UP NEW DEBT
It probably goes without saying, but avoid increasing your credit card debt if you can help it. I understand that sometimes financial emergencies happen, and additional debt is unavoidable. But if possible, don’t let your balance grow anymore.
PAY MORE THAN THE MINIMUM AMOUNT
If you make only your minimum payment each month, it could take you years to pay off your current credit card debt.
Let’s say you have $10,000 in credit card debt with an interest rate of 18%. Based on the normal formula to calculate the minimum payment, you’ll pay about $250 per month, and it will take you a little over five years to pay off the debt.
But over that five years, you’ll pay more than $5,300 in interest. Yep, more than half of the amount you initially borrowed. But if you doubled your monthly payment, you’d pay it off in just two years and pay only about $2,000 in interest.
STOP USING YOUR CREDIT CARDS
Using a credit card that already has a balance on it can make it even more difficult to get out of credit card debt.
First, when you’re mixing old purchases with new ones, it can be difficult to separate them and know how much you should pay each month.
It’s also easier to convince yourself that it’s okay to go into just a bit more debt.
Let’s say you have $5,000 in credit card and want to make a $100 purchase that you can’t quite afford. Instead, you put it on your credit card. What’s another $100 on a $5,000 balance, right?
The problem is that most of us don’t do this just once (and I know this from personal experience). Instead, you’ll use this argument to justify purchase after purchase as your debt continues to grow.
For the time being, it’s better just to avoid using any credit cards with balances already on them.
Are credit cards right for you?
Listen, I love credit cards. I love how they help my credit score, and I especially love the money I save with credit card rewards. But I can also acknowledge that credit cards aren’t right for everyone.
If you’re someone who struggles to control their spending, then credit cards may not be right for you. Unfortunately, they’ll likely do more harm than good to your credit score. And the rewards you earn on your credit cards will be outweighed by the interest you end up paying.
If you really aren’t sure whether using credit cards is the right move for you, try asking yourself this one question: Can I commit to sticking to my budget and paying off my full credit card balance each month?
If the answer is yes, then you can probably benefit from credit cards. If the answer is no, then it’s probably better to skip them.
You can see my favorite credit cards by visiting the full list of my favorite money tools and resources.