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Using Credit Cards Responsibly

Brendan Harkness

Brendan Harkness

Updated Sep 13, 2016

Being a responsible credit user means educating yourself in the basics of what credit is, how it works, and how credit cards can affect your credit.

Credit cards are serious financial tools that need to be treated as such; misusing a card can leave you with a surprising amount of debt and saddle you with payments for years.

Remember that using credit cards is a privilege, not a right. They’re a privilege you’re allowed to use based on the worthiness of your credit history.

Abusing your credit cards could result in them being revoked. Respect credit cards as the powerful financial tools that they are and they will treat you well.

So, let’s get right to the two main steps to using credit cards responsibly.

Step One: Understand How Credit Works

Your credit is your reputation as a borrower of money. It’s based on your previous experiences using lines of credit, as well as borrowing money and paying it back.

Lenders and providers of credit send reports of your financial behavior to the credit bureaus, which report the information in your credit reports.

Your credit scores, like your FICO score, are based on this information. Responsible use of financial tools like credit cards and loans has a positive impact on your credit, and increases your credit scores; irresponsible use hurts your credit and decreases your scores.

Start by learning about these two important parts of your credit: your credit reports and your credit scores.

Step Two: Understand How Credit Cards Work

Once you understand how credit works, you’re ready to apply for credit cards and begin using them responsibly.

It’s not hard to use credit cards responsibly and profitably, but it will take a bit of effort to learn how to use them correctly. Just take your time, read through our credit resources, and you’ll be fine. If you have any questions, just use the ASK button in the top right to let us know.

Here are some quick and easy tips that will keep you on the right track:

  • Become acquainted with your credit card’s website and the features you find there.
  • Know the interest rates, credit limits, and fees associated with your card.
  • Know the rewards and benefits that your card provides.
  • Know your statement closing dates and due dates.
  • Keep track of your physical credit card at all times.
  • Pay your balance in full each month, and if for some reason you can’t pay it all, pay as much as you can.
  • Avoid late payments; set up autopay for at least the minimum amount required.
  • Check your card statements often for fraudulent or unauthorized activity.

Now take a look at these two resources for a more detailed explanation of how credit cards work and how to use them correctly to build your credit:

How Paying a Credit Card Works: A timeline of the entire credit card process, beginning with an application and going through some example purchases and payments. Includes statement closing dates, due dates, and how these actions will affect your credit.

The Definitive Guide to Building Credit with Credit Cards: Everything you need to know about how to use credit cards to consistently improve your credit and credit scores.

We’ve also answered some frequently asked questions on this page, so keep it handy as a reference!

Credit Card FAQ’s

How Much Will a Credit Card Cost?

There are a few costs and fees that credit cards might come with:

  • Annual Fee
  • Purchase APR
  • Balance Transfer APR / Fee
  • Cash Advance APR / Fee
  • Penalty APR
  • Late Payment Fee
  • Returned Payment Fee
  • Over-the-Limit Fee

Annual Fee

You’ll find an annual fee on many higher-end cards, which come with better rewards, discounts, and travel benefits like airport lounge access or complimentary amenities. There are also many very rewarding and useful credit cards that don’t have annual fees.

Purchase APR

This is the interest rate you’ll pay for purchases you make with the card. Check your card terms for your purchase APR, which is also called the Regular APR. Your purchases will appear on your monthly statement.

The interest for those purchases will usually start to accrue after the due date on that statement, and you’ll find those interest charges on the following month’s statement (the time period between the statement closing date and the due date is known as the grace period).

You can avoid paying any interest if you always pay off your account balance in full by the due date. See this example to learn more about how to avoid interest charges.

Balance Transfer APR / Fee

This is the interest rate and fee you’ll pay for balance transfers to a new credit card account. Read the card terms carefully, because there is usually a limit to how long you have to make the transfer.

You’ll also usually pay a fee for balance transfers, somewhere around 3% to 5% of the balance.

Cash Advance APR / Fee

The interest rate you’ll pay if you want to take out a cash advance using a credit card, usually much higher than the regular purchase APR. Check your card terms for your cash advance credit limit, which is different than your regular purchase credit limit.

Cash advances are generally not recommended because you’ll start accruing interest instantly, instead of waiting until after the due date like purchases. There is also usually a fee for cash advances, of around 5% of the advance.

Keep reading to learn why cash advances are usually a bad idea.

Penalty APR

Many credit cards also have this punitive interest rate for purchases, which the card issuer could apply to your account if you make a late payment, returned payment, or go over the credit limit. The penalty interest rate is usually 29.99%; check your card terms to see if this could potentially apply to you.

Insider Tip: Watch out, because a Penalty APR can even replace a 0% introductory rate, cutting it far shorter than it would have been.

You may be able to remove the penalty APR and go back to your original interest rates after you show some months of responsible activity. Check with your card issuer for details on how you can do this.

Late Payment Fee

Many cards will charge a fee for late payments. The exact amount may vary depending on your account balance, but it usually doesn’t exceed $35.

Returned Payment Fee

Just like the late fee above, many cards will charge a fee for payments that are returned from the bank. This fee is usually $35.

Over-the-Limit Fee

Some cards will charge a fee for going over your credit limit, though many today do not.

Q&A Video: What Is the Schumer Box in Credit Card Terms?

How Much Should I Spend with My Credit Cards?

This is one of the most important questions you can ask yourself about credit cards. The key factor here is your credit utilization, also known as your debt-to-limit ratio. This is simply the amount of debt you are carrying on all of your credit cards, compared to the total of all of your credit limits combined.

Most experts recommend staying below 30% or 35% credit utilization to maintain the best credit score possible, and the people with the best credit tend to have a utilization around 7%.

Your credit utilization is calculated at your statement closing date each month, so whatever balance is reported on your statement is what the credit reporting agencies see. We recommend aiming for 0% credit utilization whenever possible, which means paying off your balances before the due date.

So for example, if you have 2 credit cards that each have a $500 credit limit, your total credit limit is $1,000.

If you have a balance of $150 on each card at your statement closing dates, your total utilization will be $300.

300 ÷ 1000 = 0.30, or 30%

This means that your total utilization is 30%, which is fairly high and getting into the danger zone where it could start to have a negative impact on your credit.

Learn more about credit utilization and how it is calculated here: How Does the Credit Card Utilization Percentage Affect My Credit Score? »

How Long Can I Wait to Pay My Credit Card Bill?

Any time a consumer fails to make his credit card payment by the due date, his credit card issuer will consider the account to be “past due.”

For example, if a consumer has a credit card payment due on the 10th of the month and he does not make the payment, then his credit card issuer will consider him to be past due on the 11th.

Once the consumer’s account is even one day past due, the credit card issuer can issue an adverse action if they decide to.

Possible adverse actions include:

  • Assessing a late fee
  • Raising the consumer’s interest rate
  • Lowering the card holder’s credit limit
  • Closing the account

NOTE: All of the aforementioned actions are voluntary and at the discretion of the card issuer.

They can do all of those things at any time even if you pay on time, but being late acts as a catalyst. As far as credit reporting is concerned, late payments on a credit card are handled quite differently than late fees.

While a credit card issuer may consider an account holder to be past due immediately after the due date, the card issuer cannot report that account as late to the credit bureaus just yet. There are rules and standards that must be followed. All 3 credit bureaus have the same policy: an account cannot be accepted as being late until the payment is a full 30 days past the due date.

Until a consumer reaches the point of being a full 30 days past due on his credit card payment, the account must be reported to the credit bureaus as “current and in good standing.” This standard is clearly defined in the credit industry’s standard guide, called the Credit Reporting Resource Guide.

How Many Credit Cards Should I Have?

There is no correct number of credit cards. The right number for you will depend on your personal spending habits and finances, and what you need the cards to do for you. Despite what you may believe, having several or even many credit cards is not necessarily a bad thing.

As long as there is no annual fee, a credit card doesn’t need to cost you anything at all to own, and there are several benefits that come from having multiple different kinds of cards of varying types. For example, having more credit cards will help you keep your credit utilization low. The more cards you have the higher your total credit limit is, which pushes your utilization percentage lower.

Q&A Video: Is It Good or Bad to Have More than 3 Credit Cards?

Are Cash Advances a Good Idea?

The cash advance is a feature found on most credit cards. It allows you to take out cash at ATMs with a PIN that is issued along with your card, and it has an interest rate that is separate from the regular purchase interest rate.

The APR for a cash advances is usually much higher than the purchase APR, often around 25%. You’ll also incur a withdrawal fee, typically something like “$10 or 5% of the advance, whichever is greater.”

The most important thing to know about cash advances is that interest will begin to accrue immediately. This is much different than the regular purchase interest rate, which only begins to accrue interest after your billing date, which is usually 21 days after your statement period ends.

Furthermore, taking out cash advances can indicate that you are a greater credit risk because you need cash at such a high interest rate. Many cash advances can have a negative impact on your credit score.

Let’s say you have a cash advance APR of 25%, with a fee of $10 or 5% of the advance, whichever is greater, and you want to take out a $500 cash advance.

You’ll be charged a fee of $20 and will start incurring interest on that withdrawal at the 25% APR.

If you pay that advance back in 30 days, you’ll have incurred $10.42 in interest. Add that to the initial fee of $20 for a total of $32.42 in charges, for this loan of $500 for 30 days.

Initial fee: $500 X .05 = $20

Interest charged per year: $500 X .25 = $125

Interest charged per day: $125 ÷ 365 = .3472¢

Interest charged over 30 days: .3472 X 30 = $10.42

For all these reasons, we do not recommend taking out cash advances with your credit card.

It will:

  1. Immediately begin to accrue interest at a high rate
  2. Potentially decrease your credit score by making you look like a riskier borrower

Q&A Video: What Is the Cash Advance Credit Line?

When Should I Close a Credit Card?

While closing a credit card can sometimes be a good idea, in many cases it’s just not necessary and could actually have a negative impact on your credit.

Take a moment to learn how closing a credit card will affect your credit, as well as how to do it safely.

What if I Find Unauthorized or Fraudulent Activity?

Your credit card statements provide a monthly summary of all the transactions that took place during the previous statement period. Checking this summary every month will let you see if any unauthorized transactions took place, like payments that you don’t recognize or double-billed items.

You can check your statement online or it will be mailed to you, or both.

If you do find some unauthorized activity on your statement, contact your credit card issuer immediately by calling the number on the back of your card. The major credit card issuers all have $0 fraud liability policies, so as long as you get in touch with your issuer when you notice the problem you have no need to worry.

Learn more about what to do when you find an incorrect or fraudulent charge on your statement here: How To Dispute A Fraudulent Credit Card Charge »
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