Follow This Golden Rule of Credit Cards to Make Them Work For You

Photo to accompany story about how credit cards work. Getty Images

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$84 a month. 

That’s how much a typical credit card balance will cost you in interest payments, according to the Federal Reserve’s most recent Survey of Consumer Finances. The average credit card balance is $6,300, with an average APR, or annual percentage rate, of about 16%.

But if you follow the golden rule of credit cards, you won’t be on the hook for anything. In fact, the most responsible credit card holders never pay any interest at all.  

“I think it’s grossly unfair to vilify credit cards. It’s the only extension of credit where interest is optional,” says John Ulzheimer, a credit expert formerly of FICO, Equifax and “If I don’t ever carry a balance, I’m never gonna pay interest,” he says.

Paying off your card balance in full, each and every month, is the secret to credit card success. This approach will let the cards work for you—without hurting your finances. But new cards don’t typically come with a handbook explaining how to properly manage a credit card. So it’s easy to end up learning the hard way, and find yourself in a situation where you have to work your way out of a mountain of high-interest credit card debt. 

Here’s what we think you should know.

How Do Credit Cards Differ From Debit Cards?

When you pay with a credit card, you’re using someone else’s money, so it can be easy to spend more than you have. 

Using a credit card is essentially getting a loan from the bank, says Ira Rheingold, executive director with the National Association of Consumer Advocates. It’s sort of a short-term loan, and you can pay for it in two ways, he says: fees and interest charges. 

When you don’t pay off your card in full each month, interest charges are added to your account. There is lots of money to be made by the credit card companies by charging this interest, he says.

With a debit card, however, you’re paying with money you have in your own account. So a debit card will never leave you with debt, though you might pay fees if you overdraft the account.

How to Use a Credit Card

Credit cards can be a great way to build your credit score, when used properly. Consistently paying off your credit card in full and on time each month will help improve your credit score over time, Ulzheimer says. 

That really is the best way to use a credit card – as an extension of your bank account. Ulzheimer believes a card’s annual percentage rate (APR) should be irrelevant. “If the most important metric you’re looking at when you compare credit cards is interest rate, I would almost suggest you’re looking at the wrong product,” he says. You shouldn’t go into a relationship with a card issuer expecting to carry a balance. In that case, he suggests a debit card or charge card that must be paid off each month as better options.

Once you’ve built a healthy relationship with credit cards, you can also take advantage of rewards programs. As long as you’re paying your bill each month in full and on time, rewards credit cards can be a great way to get cash back for travel or other expenses. Many credit cards also come with hidden perks, like extended warranty benefits or built-in rental car insurance. So your credit card could save you money in more ways than you may realize.

How to Be Smart With Your Credit Card When Times Are Tough

The pandemic and ensuing recession has many people struggling to make ends meet right now. This means more people are dependent on credit cards, says Rheingold. This is very dangerous because people may not have the income to pay back that debt, he says. 

Pro Tip

Never pay only the minimum amount of your credit card balance each month. If you do that, you’ll end up paying much more in interest charges than the original balance.

In this case, credit cards are not a long-term solution, even if they aren’t as bad as payday loans or payday loan apps. But there are steps you can take to minimize the cost of using a credit card to get by.

You should do everything possible to at least meet the minimum payment requirement each month. If you’re just one day late on a payment, you’ll usually get hit with late fees and may trigger a penalty APR. A penalty APR is a much higher APR that typically applies for at least six months.

Most credit cards have a cash advance feature which allows you to use your credit card to get cash, but it’s an expensive option. Cash advance fees are typically $10 or 5% of what you withdraw, whichever is higher. A credit card cash advance typically comes with a higher APR than a standard purchase.

If you’ve missed a payment or are carrying a balance, it’s worth calling the bank and explaining your situation. Better yet, if you think you might miss a payment, call your credit card issuer to discuss the situation in advance. Many credit card issuers are offering coronavirus relief by waiving or reducing fees and interest rates.

What to Watch Out For With Credit Cards

Credit cards come with an assortment of fees you should be aware of, because most of them are completely avoidable if you understand when they’ll apply.

The first thing to look at is a credit card’s annual fee. This is a flat fee you pay each year just to have the card. In some cases, the value of rewards and other perks can make the annual fee worth paying. 

Let’s say your annual fee is $129. If your spending yields more than $129 in rewards, then the annual fee is worth it, Ulzheimer says. However, if you’re at all unsure about whether or not it’s worth it to pay an annual fee, then just keep it simple with a no-annual-fee card. This is especially true if it’s your first credit card.

Once you have a card, the cost that can end up being the most expensive is interest. You’ll typically only be charged interest if you don’t pay off your balance in full each month. Credit cards usually only require small minimum payments to avoid late fees, but paying only the minimum payment means carrying over a balance that will incur interest charges. The minimum payment is often a small amount, like $25 or 1%-2% of your total balance, so if you only pay the minimum amount due each month, you could end up paying much more in interest than the amount of your original balance.

A basic credit card calculator illustrates just how much you can end up paying in interest by only making minimum payments:

BalanceInterest RateMinimum Monthly PaymentInterest PaidTotal PaymentsTime to Pay Off
Credit Card$2,000.0015%$30.00$5,900.76$7,900.7630+ years

There are other fees that may apply in specific situations. Some cards charge foreign transaction fees when you’re making purchases in a foreign currency. Credit cards also charge cash advance fees, and unlike with a regular purchase, interest is charged on a cash advance from the day the transaction was made.