Responsible Credit Card Use Can Improve Your Credit. Here Are 5 Rules to Follow

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Opening a new credit card is a big step for your financial future, but it’s one that shouldn’t be taken lightly. 

While credit cards can come with major benefits and savings, they can also be costly without responsible use. The average credit card APR — what you pay in interest — is around 15%, which means any value gained from those perks can be quickly outpaced by high-interest debt for the millions of Americans who carry card balances. 

By practicing good credit habits from the start and knowing which factors contribute most to your score, you can use your credit card to build good credit that lasts.

Using Your Credit Card Responsibly

A credit card is a valuable tool for building good credit, which you’ll need for other financial goals in the future, like buying a home or borrowing money to start a business

That’s because credit card issuers report your credit balances and payments to the three credit bureaus — Experian, Equifax, and TransUnion. As long as you only charge what you can afford to pay off and make all your payments on time, you should see positive changes to your score over time.

Pro Tip

If you’ve had trouble getting approved for a credit card in the past, consider a secured credit card. Secured credit cards require an upfront cash deposit as collateral, but they can help you build good credit so you can upgrade later on.

On the other hand, late or missed payments and rising debt balances can cause your score to drop in a hurry. You shouldn’t view your card as a ticket to overspend while only making minimum monthly payments. Maxing out your credit limit each month, missing payments, or racking up debt can stall out any progress you’ve made to improve your credit score.

To make the most of your credit card, develop a plan to pay your bill in full and on time each month. You’ll not only build credit, but can also take advantage of your card’s benefits and rewards without risking lingering debt. 

Before you apply for a new credit card, here are some important card details you should understand, and best practices to keep in mind:

Understand Your Terms of Service

The card agreement you receive from your issuer upon approval is the best source of information for anything you need to know about using your card.

Thanks to the Credit CARD Act of 2009 these agreements are standard, so every credit card comes with a set of terms and conditions that explain the relationship and expectations between the credit card issuer and the cardholder. 

Your credit card’s terms of service may be several pages long with plenty of fine print, but these are the main card details you should look for:

  • Annual Percentage Rate (APR): The interest you’ll pay if you carry a credit card balance from one month to the next. Note that you may have different APRs for different types of transactions, such as purchases, balance transfers, and cash advances.
  • Fees: These may include annual fees, late payment fees, returned payment fees, foreign transaction fees and over-the-limit fees. Also look for balance transfer fees — these will apply if you use a balance transfer card to consolidate debt.
  • Payment Policies: Details like the length of each billing cycle and how long you have to pay your bill (known as your grace period) before interest accrues are included in your card agreement. 
  • Rewards: If your credit card offers rewards points or cash back, they’ll be outlined in your credit card terms and conditions. You’ll also find details about the card’s welcome bonus, including minimum spending requirements and timeline.
  • Cardholder Benefits: Beyond rewards, look for other cardholder perks you may be eligible for, such as travel insurance, purchase protection, or extended warranties, and the limitations of each.

Pay Your Bill On Time

Always pay your credit card bill early or on time. Since your payment history is the most important factor in your credit score, late payments can have a big negative impact on your credit. Stay on track by taking note of your credit card’s payment due date, then setting a reminder for yourself each month, or even opting into automatic withdrawals from your bank account. 

Know Your Credit Limit

The second most influential factor in your score is the amount of debt you owe in relation to your credit limit, or credit utilization ratio. Credit bureaus often look at individual account ratios as well as your overall utilization for all revolving credit accounts. Knowing your credit limits — and keeping your balances well below them — is an important part of maintaining good credit.

Generally, you should strive to keep your credit utilization as low as possible. For the best results, a credit utilization of 10% or below is ideal. If you want to maintain a good credit score, this means carrying total balances of $1,000 or less for each $10,000 in available credit you have.

Avoid Interest and Debt

Even in today’s historically low rate environment, credit card interest rates remain high. If you only pay the minimum amount due on your credit card, and carry a balance month-to-month, those high interest charges can quickly lead to long-lasting debts.

Accruing debt on your card balances means every purchase you make costs significantly more, and you risk wiping out the value from any rewards you earn. Plus, at rates exceeding 15% or 20% APR, those debts can spiral out of control fast, especially if you face a period of financial hardship, due to unemployment or other income loss.

Avoid credit card debt and interest altogether by using your credit card for planned purchases only, or in conjunction with a monthly budget or spending plan. And if there is a point where you can’t avoid taking on debt, develop a payoff plan to eliminate your balance as quickly as possible.

Monitor Your Spending

Credit cards are convenient, and they offer great benefits like purchase protections and security from theft. Monthly statements also make it convenient to monitor your spending with a credit card. Instead of tracking receipts or account withdrawals, you can use your card account to know exactly how much you spent and where.

But that convenience factor can also make it easy to overspend if you’re not careful. When you swipe a credit card, you don’t see the automatic withdrawal from your account or hand over any physical cash, so it might be easier to spend more than you typically would. 

Throughout the month check your account regularly, so you can get your spending in check before charging more than you can afford to pay off when your statement is due — and avoid any debt balances.

Bottom Line

Using your credit card responsibly ultimately comes down to paying your statement balance in full and on time each and every month. The habits you develop to do so —  like tracking your spending, keeping your balances low, and having a payoff plan — will not only help you make the most of your card’s benefits, but also set you up for maintaining great credit long-term.