How to Use a Credit Card to Your Advantage [2023 Guide]
Last Updated: March 17, 2023
Best credit card tips in one place! Read on and learn how to use a credit card to your advantage, enjoy all its benefits and stay debt-free.
We have elaborated on the does and don’ts of credit card usage. Read on and learn how to properly use a credit card, enjoy all its benefits and stay debt-free.
If you ever wondered how to use a credit card, and make the most of it, you are in the right place.
We gathered the most important tips and tricks to help you stay on top of your credit card game.
You will find out the best practices on using credit cards, and also the things you should avoid.
Most importantly, you will learn how to use your credit card in a smart and responsible way, so you can restore or maintain good financial health, build good credit, and eliminate debt.
So, let’s get started!
How Does a Credit Card Work?
A credit card is a card issued by a financial company that allows you to make purchases and borrow money for a short term.
Unlike the debit card, when you purchase with a credit card the money is not taken from your account. Instead, it’s deposited by the issuer of your credit card.
Every credit card comes with a credit limit. Instead of giving you all of the money, the lender gives you the freedom to determine how much you will spend. You can make purchases, or even withdraw money up to the set limit.
The basic principle of how credit cards work is that the amount of money you spend decreases your credit limit. Once you pay it back, you have your full limit at your disposal. This is why a credit card is often referred to as a revolving credit line.
Financial companies that issue credit cards give a certain amount of time to pay back the money you used in recent purchases without paying any interest, meaning you can actually borrow money for free.
Convenient, isn’t it?
This is known as a grace period and paying your debt within this timeframe is the best way to use a credit card.
Having a credit card gives you a certain level of financial freedom by having a set amount of money at your disposal if you happen to need it. Also, it makes it possible for you to pay for your purchases later. In case you’re paying your credit card bill from an interest-bearing account, this means that the more time money spends on your account, the more accumulating interest you’ll get.
A credit card can also be helpful If your monthly budget is stretched out after paying bills and you’re simply not prepared if something unpredictable happens. In this case, it’s even more important for you to learn how to properly use a credit card.
To do that, you must be familiar with the ups and downs of credit card usage.
What Are the Advantages and Disadvantages of Credit Cards?
Advantages of using a credit card can be downright rewarding, and here are just a few:
Building your credit score
If you have a bad credit score, using a credit card and regularly making your monthly payments can significantly improve your situation with credit bureaus.
One of the best credit card usage tips is to use the advantages of this period to the fullest and avoid paying interest.
Making purchases with your credit card can get you points on every dollar you spend. Some cards give bonus points for different categories of costs, so you can adjust your credit card choice to your spending habits.
Certain credit cards give a percent of the money spent on all or some purchases back to the cardholder. This can be in form of a check or bank account deposit or it can be applied to a credit card bill.
What happens if it gets stolen is one of the important things to know about credit cards. Unlike your debit card, when a credit card is used, the money is not instantly disappearing from your account so you have time to inform your credit card company of what happened and simply don’t pay for the transactions you didn’t make.
Additional warranty or insurance policies
Many credit cards provide their users with insurance policies, like car rental or travel insurance. Additionally, some products have a longer warranty period when purchased with a credit card.
Some of the credit cards offer a welcome bonus to their users who have a good credit profile.
To know how to use a credit card wisely, you must also be aware of the disadvantages of credit card usage:
If you often find yourself exceeding your monthly budget and don’t make your minimum payments, the interest and late payment fees might add up, leaving you with a lot of additional costs.
Charges and fees
Credit cards can have different charges and fees that add up to the cost of their usage. For example, annual fees, late payment fees, foreign transaction fees, etc.
Negative effect on your credit score
Understanding credit cards means that you are fully aware that if you don’t use your credit card responsibly it will reflect negatively on your credit score.
Certain credit cards may have a very high interest rate. To avoid this, you can opt for one of the best credit cards with no interest.
Based on the things listed above we may conclude that, although it has its downsides, credit card usage may really make a good impact on your financial health when used properly.
Keep reading to find out how.
How to Use a Credit Card Responsibly?
Don’t let the possibility of debt, paying a lot of charges and fees, and other similar things discourage you.
After reading this article, you will know all the tricks of enjoying the benefits of a credit card without having to worry about the consequences of irresponsible use.
All it takes is a little discipline and knowing exactly what to pay attention to.
First, let’s give some advice on the responsible use of credit cards for new users:
Choose the right card.
Depending on your preferences, income, and overall credit score, find the best card that meets your needs.
Get the most out of your credit card benefits.
Read your card agreement carefully and make sure you’re not paying extra for any benefits that you don’t need or won’t be able to use.
Plan your budget.
Planning the amount of money you can spend, so you can pay back within the grace period to avoid any losses, is one of the essentials on how to best use a credit card. Be aware of your card’s billing cycle and plan your purchases as far as possible from your card’s due date, so you have extra time to pay back the money and avoid interest charges or late payment fees.
Know your annual percentage rate (APR).
The annual percentage rate is the interest rate that will apply for all balances that you have on your credit card over the grace period. The lower your APR is the less interest you will pay. Even if the initial plan on how to use a credit card is to pay back all balance before the interest starts accruing, it’s very important to know what is a good APR for a credit card in order to choose wisely.
Be aware of all fees.
Read all terms and conditions connected to your card carefully. Don’t be late in making your monthly payments. Don’t pay for anything abroad if your card has a fee set for such transactions. You could avoid paying annual fees as well by choosing one of the best zero annual fee credit cards.
Regardless if you are a new user or not, read on to make sure you don’t miss important tips and tricks to make your credit card work for you.
Best Credit Card Tips
Closely monitor your account statements.
Make sure to spot and report every mistake on time. Most credit card companies won’t hold you responsible for any fraudulent payments, but it’s crucial that you monitor your credit card activity and report any mistakes as soon as possible.
Never miss a payment.
Monthly payments must be met regularly. Missing them might negatively impact your credit score and cause additional costs by late payment fees. A great solution is to make adjustments so that your bill is paid automatically from your bank account on a set date.
Avoid paying the bare minimum.
The smartest way to use a credit card would be to pay the total amount you owe every month before or on the due date. If that’s not possible, at least try to avoid going for the bare minimum, except when absolutely necessary. Instead, try to pay as much as you can every month. Also, when prioritizing payments, make sure to first pay any overdue bills.
Keep your credit utilization ratio low.
This represents the ratio between your credit limit and the amount of money you have used. For example, if your limit is $1,000, and you used $500, your credit utilization ratio is 50%. Ideal credit card utilization implies that this score is under 30%. That will help you maintain a good credit balance, and also keep you away from overspending and getting into debt.
How Does a Credit Card Impact the Credit Score?
A credit score is one of the main criteria used to determine your financial health. It’s also the most important data that lenders use to decide whether to lend you the money and under what conditions.
Considering that a debit card doesn’t appear in your credit reports, the way you manage your credit card has a significant impact on your credit score.
Payment history is actually the biggest point that determines your credit profile and if you know how to use a credit card, it will give your credit score a boost.
By making your monthly payments regularly and keeping your credit utilization ratio low, you are proving that you’re creditworthy and capable of managing loans.
If you have a poor credit score, you can actually start using a credit card to improve it. In this case, you will probably be using a secured credit card.
This type of card has a cash deposit that you pay upfront. You use it like a regular credit card and your activities are reported to the credit bureaus. Find out which are the best-secured credit cards and choose the one that best meets your needs. It’s still important to know how to use a credit card properly, even if it’s a secured one, so you can improve your credit score and credit profile.
Common Credit Card Mistakes to Avoid
You’ve already learned that using a credit card may have a lot of benefits. It can make your monthly budget more flexible, as well as improve your situation with the credit bureaus.
But to enjoy these benefits, you must know how to responsibly use a credit card and avoid some of the most common mistakes:
- Maxing out your limit
- Not keeping track of your costs
- Skipping your payments
- Missing on checking and disputing your account statements for mistakes
- Not being familiar with all aspects of using your credit card
You can easily avoid all of the listed mistakes by thinking of the credit card as an extension to your monthly budget, and not as the means to buy things you can’t afford. If you don’t find your card limit enough, find out how to increase it.
It’s also important to know when to use a credit card. Avoid paying for a lot of unplanned small purchases that may build up and generate a considerable amount of interest.
Being aware of all your expenses is a responsible way to use your credit card. Most credit cards have available tools for you to keep up to date. Follow closely and eliminate all unnecessary credit card costs.
If you want to find out more about the ways to balance your finances, read all about the personal loan vs credit card comparison.
You have now mastered the best practices and the main principles on how to use credit cards to your advantage. Hopefully, you will make the most of it and apply this useful advice to improve your budget and overall financial health.
Keep in mind the essentials:
- Make your monthly payments regular and over the minimum
- Pay all the balances within the grace period
- Don’t spend over 30% of your overall credit limits
Now you’re all set to enjoy the additional payment options, credit card benefits, and keeping up a good credit score while avoiding interest charges, unnecessary fees, and debt.
It depends. If you are using all the cards properly, making monthly payments on time, and keeping a low credit utilization ratio, there is no reason for it to be a bad thing.
It can even have a positive effect on your credit score, by increasing your total credit limit.
If a credit card has an annual fee, you will still have to pay it regardless if you use the card or not. Keeping a credit card without using it can affect your credit score, so make sure to keep in mind the influence it has on your credit profile.
There is no general rule on how to use a credit card regarding the frequency of its usage. Credit card issuer’s policies differ, so it may be a good idea to check your agreement or use the card at least once in three months to avoid cancelation.