Credit Cards: What to do, What not to do

Written by

Key Takeaways

  • Using credit cards for purchases can be a great way to get something extra, such as rewards, purchase protection, and building your credit score.
  • On the other hand, don’t charge more than you can pay off in the next billing cycle, miss a payment, and always always read the fine print.
  • To see different credit card options that you can filter by different criteria like rewards, APR, credit score required, etc. go to our credit card page.

Getting a new credit card – especially if it’s your first one – can feel like a significant accomplishment, but it’s important to recognize that what you now have is a new financial tool. And like any tool, its purpose is to make your life easier. But there are also ways to misuse credit cards that can put you in worse shape than you were before.

Focusing on the advantages of credit cards and avoiding the easy pitfalls can help you navigate towards the financially responsible course.

What to do with credit cards

Earn rewards. The credit card industry is extremely competitive – that’s why companies try to make themselves stand out by offering you perks to use their card. One of the most popular developments has been the “rewards” card, which offers you a financial benefit whenever you spend money on the card. Traditionally, this comes in the form of points that you can accumulate for another purchase, airline miles toward a plane ticket, or cash back that can offset a simple purchase like paying for gas. Standard rewards are often around 1%-2% of your purchases, but card issuers also frequently offer limited higher percentages on specific merchandise that can be as high as 5% or more. As long as you’re being rewarded for purchases you’d make anyway, this type of card can be a great deal.

Build your credit score. More than one-third of your credit score calculation comes from your payment history on credit accounts. Paying your credit card bill on time can be a good contributor to boosting your score, which can help you get better rates in the future on major financial transactions like car loans and mortgages. In addition, if this is your first card, using it will establish your credit history and could become part of expanding your variety of debt, another credit score-boosting factor.

To see how different factors can affect your credit score, sign up for our free credit monitoring service and then check out the Credit Monitoring Tips on how you can increase your credit. Or try the Credit Simulator Tool where you can see how actions like paying your credit card bill on time for up to 24 months can impact your credit score.

Smooth out your cash flow. If you’re part of the gig economy, you may have irregular income that can make some of your financial obligations harder to manage with cash alone. A credit card can help you avoid late payments on bills (credit score killer!) and stay on track. Do all you can to pay off your entire credit card balance at the end of the month to avoid finance charges.

Transfer your balances. Many cards will offer you initial, low interest rates – some introductory offers are even 0%. If you’re carrying a high interest rate on another card, it could make sense to transfer your old balance to a new card. Just be sure to determine any balance transfer fees, which can be 1-2% of the transferred balance, and when your introductory rate expires. Make sure the adjusted rate isn’t higher than your current card.

Boost a child’s credit. If your children are ready for more financial responsibility, you can add them as an authorized user to your credit card. They’ll likely get a boost to their limited credit history, and both you and your child can benefit from building good habits. But take note that you’re ultimately responsible for making all of the payments so keep an eye on your child’s spending!

Protect your purchases. Most credit card offer valuable purchase safeguards, particularly against fraud, or if you don’t receive something that you paid for (especially useful for online purchases). In most cases, you can simply contact your credit card issuer and request a chargeback. A credit card also offers a good substitute for rental car insurance, which most rental car providers are constantly trying to convince you to buy. Just about every card gives you a no-cost collision damage waiver policy, as long as you waive optional policies and stick to the types of vehicles covered.

What not to do with credit cards

Over-extend yourself. Credit cards are like many things in life – they’re best used in moderation. The most efficient financial use of a credit card is to never charge anything that you can’t pay off by the end of the billing cycle. Think about it: if you charge a big purchase, say $600, but only pay half of it off when your credit card bill is due, the $300 balance will incur a finance charge next month. All of a sudden, that great deal you might’ve gotten at $600 has cost you an extra $10 or $20 for each month you don’t pay the entire outstanding balance in full. Another helpful part of your monthly statement now gives you a projection of how long it will take to pay off your credit card debt if you only pay the minimum required. At double-digit rates, even a modest balance could take several years to pay off.

Have too many cards. Having available credit is great, but always keep in mind the temptation to use active cards. Once your balances start to increase across your credit accounts, your credit score can take a hit.

On the other hand, having extra cards can be good – just shoot for keeping a low credit utilization ratio (the amount of debt you carry compared to your overall available credit).

Forget to read the fine print. Rewards cards can be an excellent deal, but make sure you’re aware of all the terms. Some cards, for example, will require you to spend a certain amount to get advertised perks – sometimes several thousand dollars. Other cards have hidden caps on how much you can spend and still get the same cash-back award. And don’t forget to check if your travel awards have expiration dates.

Miss a payment. As we’ve mentioned in our 5 factors that impact your credit score post, consistently making late payments can become a part of your credit report and drive down your credit score – making up 35% of your credit score weighting.

But there are other serious considerations: some rewards cards deduct points you’ve already earned in a particular month if your payment is late. You may also get charged a $25 reinstatement fee to get the points back. If you tend to cut your bill paying close, it might be worth it to set up account alerts for payment due dates or register for automatic payment from a bank account.

Credit cards are a great financial tool… if used smartly. Just be careful to not fall for any of the common pitfalls listed above, or the great benefits you can enjoy from using credit cards could disappear quickly.

Sign Up
Sign Up
Sign Up