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Of all the financial assets at your disposal, your credit card might be the one that unlocks the most power.
Far more than a piece of plastic (or metal) that helps you pay your bills, it can also help you travel the world for little to no cost; save money on transportation, groceries, streaming services and Amazon purchases; and help get you travel perks such as lounge access or airline and hotel elite status.
Of course, a lot of this depends on the card you have. As a rule of thumb, the higher the annual fee, the more perks you’ll get out of the card. Perks can often offset the cost of that fee, so it’s important to look for a card whose perks you can really enjoy.
Credit Card Fundamentals
Having a credit card (or cards) is a pretty significant financial responsibility. This means paying your bills on time and in full every single month. Having a credit card can be a great way to take advantage of perks, but carrying a balance will quickly cancel out any financial benefit. Don’t spend on things you wouldn’t ordinarily buy if you were paying with cash or a debit card.
If you do need to carry a balance for any reason, be mindful of the so-called credit utilization ratio, or the percentage of your available credit that you are using. Balances over 30% of your available credit — the sum total of the credit you have on all your cards — will have a negative impact on your credit score. Credit utilization counts for almost a third of your score, and credit bureaus take into account both the utilization rate for each card and across all cards you have.
We also strongly recommend knowing, and protecting, your credit score. Before you apply for a card, you should be aware of the credit score range that the card’s issuer typically demands. The lower the score, the riskier a borrower is considered, and some cards — generally those that offer the most perks and carry an annual fee — require very good or excellent credit.
Most card issuers do a so-called hard pull on your credit when considering you for a card, which causes a ding on your credit report, although it’s usually minor and absorbed quickly. (Some do a soft pull instead, which means they can tell you if you’ll get the card without you getting a ding on your score.) Keep this in mind before you apply, and do not go for a card that is clearly above your current credit score.
Even when you are no longer using a card, you might not want to close the account, especially when the card does not have an annual fee. That’s because closing a card account can negatively affect your credit score, by raising your utilization ratio. If you no longer want a certain credit card, for example because you don’t want to pay the fee, it could be worth downgrading it to another card with a lower annual fee from the same issuer.
Why You Should Get a Credit Card
Now let’s talk about why you should get a credit card.
Many cards give you the opportunity to earn points and miles or cash back on all of your purchases. Many also come with valuable benefits such as price protection, purchase protection, trip insurance and more. Several also feature targeted offers, which will save money (or earn points for travel) on some everyday purchases.
With the right credit card, you’re spending the same money you would have spent using a debit card or cash, but you’re getting rewards back for it. And if your credit card is stolen or compromised, you have more recourse and won’t be liable for any fraudulent charges. If the same happens with a debit card, you could be responsible for up to $500 in unauthorized transactions if you fail to notify your bank within two days.
How to Use Your Credit Card the Right Way
That said, it’s important to make sure you’re using your credit card the right way, no matter which one you have.
We always recommend looking through your statements regularly to make sure there are no fraudulent or incorrect charges. If you feel comfortable with having money withdrawn automatically from your checking account, it could also be a good idea to look into putting your credit card (or cards) on automatic payment. Doing so will make sure you consistently pay your bills on time without any hiccups.
You can use your credit card the same way you do a debit card — simply swipe or insert the chip if you’re purchasing something in person, or enter the card number and security code when shopping online.
You’ll want to store your cards in a secure place, and if you lose them for any reason, be sure to call your credit card company immediately. In some cases, you can lock your card from your online account, making sure that no one can use it if you have lost it.
Credit Card Tips
There is no perfect or best credit card, since everyone has different spending habits and both financial and travel goals.
The key here is to make sure you do your research ahead of time. You’ll want to look into annual fees, travel and other perks (including access to airport lounges, credits for TSA PreCheck or Global Entry expedited security and passport checks, and more), as well as opportunities to earn points or cash back.
If you’re interested in using points for travel, be sure to look up which airline and hotel partners you can transfer your points to. For example, if you want to stay in a particular Hyatt hotel during your next trip, you won’t want to rack up American Express Membership Rewards points, because you can’t transfer them to Hyatt. You can, however, transfer Chase Ultimate Rewards points to Hyatt, and you can collect them using certain cards issued by Chase. Transferring your credit card points to airlines and hotels is one of the best ways to get the most value out of them.
Having a credit card that matches your spending habits can be a great way to complement your financial strategy. It can help you save money on your purchases, earn points for future travel, and even provide some peace of mind if you lose it for any reason — all attributes that using a debit card or cash just can’t compete with.