What we'll cover
How a credit card works and how to use it
How to choose the right credit card for you
What a credit score is and how to build one
Credit cards can be convenient, but their ease of use comes with a cost, namely interest charges, fees and other financial risk, if you're not careful. Use these tips to get the convenience without overspending.
How to use a credit card
Using a credit card is simple (which is why it can be easy to overspend). When making a purchase in person, you just swipe, insert or tap your card on the machine, and if you're shopping online, simply enter your credit card number into the website.
Keep in mind: Buying something with a credit card is not the same as making a cash purchase. When using a credit card, you're essentially spending borrowed money. Your card issuer pays the merchant immediately, and you pay the card issuer (with or without interest, depending on the terms) later on.
Read more: How to repay your debt faster with spending buckets
Pick a card that works for you
Not all credit cards are the same. Understanding the advantages associated with each option can help you select the right card for your spending habits. Depending on the card you choose, you may receive various rewards, like points or cash back. Others may offer a no- or low-interest rate introductory period or raise money for a third-party organization.
Rewards cards come in either a flat-rate or rotating structure. A flat-rate structure will offer the same rate of rewards on each purchase you make. Conversely, a rotating rewards structure offers bonuses on various spending categories (like travel or restaurants).
Remember, you're using borrowed money, and you have to repay it (sometimes with a good chunk of interest).
Spend only what you can afford
Buying something with a credit card can make you feel like you're getting something for free. But remember, you're using borrowed money, and you have to repay it (sometimes with a good chunk of interest). So only use your credit card for things you can truly afford. Otherwise, you could accrue a balance that takes a significant amount of time to pay off.
Always make payments on time
Each month, you will need to make a payment by a predetermined date for the charges you accrued. When possible, pay your bill in full to avoid potential interest charges and fees. If you don't, any remaining balance will roll over into the next billing cycle and could start generating interest.
Keep credit utilization low
Credit utilization is the amount of available credit that you are using at any given time. For instance, if you have a credit limit of $10,000 and a balance of $6,000, you have a credit utilization of 60%. A lower credit utilization rate can have a positive impact on your credit score and a higher one could have a negative impact.
Review your statement each month
Understanding where your money is going can be difficult when using a credit card. Frequently log in to your online account to see recent transactions and your monthly credit card statement.
Online shoppers are often the targets of scammers. Account check-ins can also help you spot any fraudulent activity before it becomes an issue.
Understand how interest is calculated
Credit cards typically have an annual percentage rate (APR). This interest rate is how much you (the borrower) owe your bank (the lender) in interest if you don't pay your balance in full each month. APR is typically variable, which means it can fluctuate throughout the year and can be affected by your credit score. The lower the APR, the less you could pay in interest.
Understand how credit scores work
To put it simply, your credit score gives lenders an idea of your credit worthiness, or how confident they can be in your ability to repay your debt. Your FICO score is the most common credit score.
Various financial actions can make your score go up or down. You can build and maintain a good credit score by paying bills on time, avoiding too much debt and having a savings account.
Use credit cards to help build credit
These healthy credit card habits can help boost your credit score:
Opening a credit card and establishing yourself as a responsible spender
Refraining from opening multiple cards in a short period of time
Making on-time monthly payments
Maintaining a low credit utilization
Using your card regularly
Keep credit top of mind
Along with other types of bank accounts, a credit card can be an important part of your money arsenal. Following these tips can help you enjoy the convenience of one without putting your financial future at risk.
