Credit · August 19, 2021

What's the Best Way to Use a Credit Card?

You've likely heard some pitfalls and bad habits to avoid when it comes to credit cards—but what's the best way to use a credit card so you can help your long-term financial situation? Here are six ways you can better use your credit cards.

1 Build credit history

The amount you currently owe on your credit card divided by your credit limit is your credit utilization rate. It's one of the most influential factors in calculating your credit score, according to Experian. To use your credit card to help build a positive credit history, Experian recommends limiting your credit utilization to no more than 30%. If your credit card has a $1,000 limit, for example, you should try to keep the balance below $300 to stay within that utilization recommendation.

2 Pay off your balance monthly

Every credit card is different, so it's important to read your card's terms and conditions so you know how it calculates fees and interest rates. Generally speaking, most credit cards will allow a 21-day period where you aren't charged interest on purchases you've made on the card. If you pay your purchases off in full during that time or by your payment due date, you may avoid paying interest on your purchases.

3 Limit how much you spend on the card

Sticking to the recommended credit utilization ratio of less than 30% can naturally limit your credit card spending. However, your credit limit can shift up or down over time. Ultimately, the amount of money you can afford to charge and pay off in full each month depends on your unique budget. The best way to use a credit card is to do so in a way that gives you all the benefits without costing you unnecessarily.

Until you know you can resist overspending, use a credit card like you would use cash or debit. Establish and stick to a monthly budget so you know how much you can afford to spend on your credit card without going into debt. If you can't afford to pay for a purchase you're considering charging in full by your credit card payment due date, set money aside and save for it until you can.

4 Get purchase or travel protection

Many credit cards include an extended warranty on certain items. Each card varies in what's covered, for how long and up to what amount. But using your credit card to make a big-ticket purchase could lead to additional purchase protection if the item never arrives or becomes damaged due to no fault of your own. In some cases, your credit card may also extend the duration of a manufacturer warranty.

Some credit cards also offer some form of travel purchase protection and insurance, if you use the card to buy travel tickets, lodging, car rentals or similar travel expenses.

5 Earn rewards and cash back

Credit card rewards can be a great way to earn a little extra cash for spending money on items you'd buy regardless. However, you should be able to pay the balance off in full each month and avoid interest charges. Many credit cards now have quarterly rewards programs that offer additional rewards in certain purchase categories or discounts when you use your card to shop at certain merchants.

Before you assume you'll earn rewards for everything you charge, educate yourself on any limitations the rewards program stipulates. For example, some card rewards programs limit the amount of rewards points you can earn in a certain category. Others exclude certain big-box retailers from categories like grocery rewards, even if you use the card to buy groceries from that store.

6 Optimize your cash flow

If you have fluctuating monthly bills for expenses like utilities, club memberships or mobile use, establishing automatic payments for those bills on your credit card can be a safety net. It may help prevent your checking account balance from being depleted unexpectedly, leading to cash flow constraints and possible bank overdraft fees.

Remember, most credit cards allow a grace period before charging interest rates for purchases. If you get an unexpectedly high bill but pay for it on your credit card, the grace period could buy you a little extra time until you can adjust your budget to pay for it in cash. At the same time, you can avoid any consequences associated with not paying the unexpected bill on time.

Using credit responsibly means knowing what pitfalls to avoid—but it's equally important to put positive habits in place. With a smart strategy in place, you can get the most out of your credit card and use it to strengthen your financial position.


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