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How to Use a Credit Card: Best Practices and Mistakes to Avoid

How to Use a Credit Card - Best Practices Explained
Jason Steele
Jason SteeleUpdated June 24, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Having a credit card in your (real or virtual) wallet comes with a number of advantages. It allows you to pay for purchases quickly and easily, can help you build credit, and may even reward you for spending money in the form of cash back or points. But credit cards also have a dark side. If you’re not careful, they can hurt your credit and lead to a cycle of debt that can be hard to break.The key to getting all the good with none of the bad? Learn how your credit card works and how to use it wisely. Here’s what all new users need to know.     

How Do Credit Cards Work?

A credit card is a (typically) plastic card issued by a financial company that allows you to make purchases up to a pre-set limit. Every time you use a credit card to make a purchase, you are technically borrowing money from the card issuer. Unlike a typical loan, however, credit cards are a form of revolving credit. This means you are given a certain credit limit (based on things like your credit score, income, and account history). As you charge purchases to your card, the amount of available credit goes down. As you make payments against your balance, your available credit goes up again. Your credit card issuer will send you a statement every month that shows your charges, your balance, minimum payment, and due date. The minimum payment is the smallest amount you have to pay for that month to avoid a fee. However, it's always a good idea to pay more than the minimum — ideally the entire balance — if you can. The reason: If you don’t pay in full, interest will begin to accrue on your balance, though you may have a grace period of 20 to 30 days before that happens. The amount of interest you’ll pay on any balance you carry over is determined by your card's annual percentage rate (APR). The APR includes the card’s interest rate, plus any fees the card charges, annualized as a percentage. You can avoid interest charges on credit card balances by paying your bill in full by the card’s payment due date or, if offered, during the grace period.

Benefits of Using a Credit Card

There are numerous advantages to using a credit card instead of paying by cash or check. For example, using a credit card for purchases can help you:

Build Your Credit Score

Each month, credit card issuers report your account’s balance and payment information to the major consumer credit bureaus. If you make your payments on time and carry little, if any, debt, credit card issuers will report positive information to the credit bureaus. When this information is plugged into a credit scoring formula, it will likely have a positive effect on your score. Having a good credit score, in turn, can help you qualify for other loans (such as car loans and mortgages) with favorable rates and terms. 

Earn Reward Points or Cash Back

Another great feature of credit cards is that they often offer you rewards for spending the way you normally do. Because of the fees paid by merchants, many credit cards will offer cash back rewards or points/miles that can be used for airline tickets or hotel stays. And, because the credit card industry is competitive, many cards will also offer a new account bonus, such as a large number of points if you meet the spending requirements within the specified time frame.Recommended: Paying Rent With a Credit Card: Can and Should You Do It?   

Pay Down Debts

Credit cards are more commonly associated with incurring debt than paying them down, but that’s not always the case. When you open up a new card with a 0% APR promotional financing offer on balance transfers, you have a great opportunity to use your line of credit to pay off an existing debt. A balance transfer is essentially paying a credit card with another credit card. If you can pay off that balance before the introductory rate ends, you can avoid interest costs (although many credit cards will impose a 3% balance transfer fee). Recommended: Paying Taxes With a Credit Card: Is It Possible?

Finance a Purchase

Credit cards can be used to finance a purchase (you may even be able to buy a car or pay your mortgage with a credit card). Just keep in mind that interest rates can be high, and are typically higher than other types of loans (including car loans and home mortgages). If, however, you can get a card with a low or zero introductory rate, it can give you the opportunity to pay off a big purchase with little to no interest. You just have to make sure you can pay off the balance before the higher interest rates kicks in.

How to Use Your Credit Card Wisely

A credit card offers multiple benefits when used wisely and strategically. However, it can lead to multiple financial troubles if you don’t. Here’s what you can do to get the most out of having a credit card and keep your finances in good health.    

Make Payments on Time

When you pay your card late, you’ll likely incur a costly late fee, as well as interest charges. Late payments also get reported to the credit bureaus and can have a negative effect on your credit. To avoid these issues, you may want to schedule automatic payments from your bank account or set up due date reminders through your credit card account.

Pay in Full Every Month

The smartest way to use a credit card is to avoid interest charges by paying your entire statement balance each month. When you do this, you’ll essentially be using your credit card as a method of payment, not a means of finance.

Purchase Only Within Your Cash Payment Limit

To ensure that you can pay your balance in full (and on time) each month, it can be a good idea to think of your credit card more like a debit card than a credit card. That means keeping track of your credit card balance, as well as your bank account balance, and never using the card to spend more than the amount of cash you have on hand.Recommended: How to Get Cash From a Credit Card 

Stay Below Your Credit Limit

Your credit utilization ratio (the ratio between the amount of money you’ve charged and your total credit limit) is a key criteria used to calculate your credit scores. Ideally, you’ll want to keep your outstanding debt below about 30% of your available credit. Though 30% isn’t a hard and fast rule, many credit experts believe that your credit scores will suffer once you have debt that’s more than 30% of your credit limit. 

The Takeaway

Credit cards are powerful tools. When used wisely, they can be a huge convenience that helps you build credit, finance purchases, and earn rewards. When used unwisely, they can cause significant damage to your finances and to your credit scores. By understanding exactly how credit cards work and using them responsibly, you can gain all of the benefits they offer without experiencing any of the drawbacks.If you’re in the market for a new credit card, Lantern by SoFi can help. With our online marketplace, you can shop different types of cards (including credit-building cards and cards for poor credit) and compare multiple credit card offers all in one place, and without making any type of commitment.
Photo credit: iStock/PeopleImages
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)LCCC0322010

Frequently Asked Questions

How can you build your credit score with credit cards?
Can I buy a car with my credit card?
What are the different types of credit cards?

About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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