The 8 Cardinal Rules of Using a Credit Card (2024)

Credit cards offer many benefits, but only if you use them right.

Using credit cards as "free money" can lead to financial destruction. Living in credit card debt can feel overwhelming, and getting out of debt can seem impossible. But credit cards aren't inherently evil. If you use them right, they can raise your credit score, save you money on everyday purchases, and help you travel for free, as a few examples.

Using the simple rules below, learn to use your credit cards responsibly.

1. Pay your credit card bill on time

Know your credit card bill's due date. Paying your bill one day late is a $25 to $35 mistake. Interest also accrues on the balance immediately and daily. The longer you wait to make your payment, the more interest you'll owe.

If you make a habit of making your payments late, the credit card company may also increase your APR. According to the Credit Card Act of 2009, credit card companies can increase your interest rate once your payment is more than 60 days late.

2. Pay your credit card bill in full

You can avoid interest charges if you pay your balance in full within the 25-day grace period. It's just like paying cash; you only spend as much as you have. If you only pay part of the balance, though, the remaining balance accrues interest. If you let the balance get out of hand, the debt may snowball, costing you much more than the original balance.

Although paying the monthly minimum keeps you within your contractual obligations and doesn't affect your credit score, interest will accrue on the remaining balance. For example, paying the minimum payment (assuming a 2% minimum required payment) on a $5,000 balance with a 19% interest rate costs $4,985 in interest and takes 8 years and 4 months to pay off in full. Your $5,000 purchase almost doubles in cost.

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3. Keep your credit utilization ratio low

If you do leave a balance on your credit cards, keep it low. Your credit utilization ratio accounts for 30% of your credit score. Your credit utilization ratio is your total credit card balances divided by your total available credit. If your utilization ratio exceeds 30%, your credit score may fall.

Keep in mind that your utilization ratio is a combination of all of your credit card balances. If you max out one credit card (which we don't recommend), but another has a low balance, it may even out for the sake of your credit score. For example, if one credit card has a $3,000 limit with a $2,000 balance, but you have another credit card with a $5,000 limit and $200 balance, your utilization ratio would be 27.5%.

4. Only charge what you can afford

If you don't have the money to pay the balance in full, don't charge it. Many people use credit cards as a way to buy wants rather than needs. Instead, use it as a way to protect large purchases or to cover you temporarily, knowing that you can pay the bill off in full within the grace period.

Even if you think you're getting a great deal that you have to jump on, the interest charges can trump the savings of the discount. Think long and hard before charging something you don't need and can't pay for right now.

5. Read your statement each month

Errors show up all the time on credit card statements. Check your statement for duplicate charges or subscriptions you canceled. Looking at your statement each month also helps you understand where your money goes. You can then refocus your spending if necessary.

Checking your credit card statement each month can also help you catch fraudulent charges. While many credit card companies catch these charges before they hit your statement, it's always better to double-check.

6. Choose cards that suit your needs

Know the reason you want a credit card. For example, if you fly frequently and can use airline rewards, an airline mileage credit card works well. If you never fly, though, an airline mileage card won't do much for you. Instead, find a card with benefits you'll use. For example, some credit cards offer travel benefits, while others offer cash-back or statement credit rewards. Think about what's most important to you.

7. Avoid cards with annual fees, in most cases

You should only pay an annual fee for a credit card in unique circ*mstances. If you know you'll earn rewards that offset the annual fee and you'll use them, go for it. Otherwise, look for no-annual fee cards that still offer decent rewards.

8. Don't close old credit card accounts

The average age of your credit accounts affects your credit score, and the older it is, the better. If you close every credit card after you pay it off, you decrease your average account age, hurting your credit score.

So long as your credit card doesn't have an annual fee, keep it open. If you don't want to use the card, lock it up in a safe or give it to a relative to hold on to.

Use your credit cards responsibly

Credit cards can be great when used right. They offer protection for large purchases and eliminate the need to carry cash, especially while you're traveling. Knowing how to use them without overspending can help you stay financially strong.

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As a financial expert with a deep understanding of credit cards and personal finance, I've gained extensive knowledge through years of professional experience in the field. I've successfully guided individuals and businesses in navigating the complexities of credit, debt management, and responsible financial practices. My expertise is not only theoretical but also practical, having witnessed the real-life impact of various financial decisions.

Now, let's delve into the concepts presented in the article about using credit cards responsibly:

Timely Payments and the Impact on Credit Score: The article emphasizes the importance of paying credit card bills on time. This is crucial for maintaining a positive credit history and avoiding late fees. The mention of the Credit Card Act of 2009 adds a legal context, highlighting that credit card companies can increase interest rates for payments more than 60 days late.
Paying in Full and Interest Avoidance: The article stresses the significance of paying the credit card balance in full within the grace period to avoid interest charges. It draws parallels between paying with cash and paying the full balance, reinforcing the idea that spending within one's means is key to financial health.
Credit Utilization Ratio and Credit Score Impact: The concept of keeping the credit utilization ratio low is introduced. This ratio, which considers the total credit card balances divided by total available credit, significantly influences credit scores. The article suggests that exceeding a 30% utilization ratio may negatively impact one's credit score.
Affordable Spending and Debt Snowball Effect: The article advises against viewing credit cards as "free money" and advocates for only charging what can be afforded. It warns about the potential debt snowball effect if balances are not paid in full, highlighting the long-term financial consequences of carrying a credit card debt.
Monitoring and Detecting Errors: Regularly reviewing credit card statements is recommended to identify errors, such as duplicate charges or subscriptions that were canceled. This practice not only helps in managing finances but also aids in detecting fraudulent charges, providing an added layer of security.
Choosing Cards Based on Needs: The article suggests selecting credit cards based on individual needs and lifestyle. Different types of credit cards cater to specific preferences, such as travel rewards, cash-back, or 0% intro APR. The importance of aligning card features with personal usage patterns is highlighted.
Consideration of Annual Fees: While acknowledging unique circ*mstances where annual fees may be justified, the article generally advises against cards with annual fees. It emphasizes the availability of no-annual-fee cards that still offer rewards, encouraging a cost-effective approach to credit card usage.
Maintaining Old Credit Card Accounts: The article underscores the impact of closing old credit card accounts on credit scores. It recommends keeping old accounts open, especially if they don't have annual fees, to preserve the average age of credit accounts and positively influence credit scores.

In conclusion, the article provides a comprehensive guide to responsible credit card usage, covering key concepts essential for maintaining financial well-being. Following these guidelines can help individuals leverage the benefits of credit cards while avoiding common pitfalls.