How to use a credit card?
What is a credit card and Why get a credit card?
A credit card is a payment card that allows users to purchase goods or services, or withdraw cash, on credit. The main reasons to get a credit card are added layer of protection when buying things, and it helps when you’re trying to get better interest rates which is useful when buying a car or a house.
Terms you should know:
Statement balance: is the amount of money owed on a credit card at the end of a billing cycle. It’s the total of all purchases, fees, interest, and unpaid balances from that period. (So if your statement period was from Jan 7- Feb 7 its all the money you spend during that time)
Closing date: is the final day of its billing cycle. It’s the date when the bank calculates your interest charges and minimum payment, and post your statement. (So if you used the previous example above, Feb 7th would be the closing date and that’s also the day when the credit card company looks at how much you’ve been using your credit card to determine if your Fico score goes up, down, or stay the same)
Credit card utilization: is the percentage of your available credit that you’re using. Statement balance/ total credit limit = Credit utilization ($500 statement balance/ $1000 credit limit = 50% credit utilization)
FICO score/Credit score: Used by lenders to assess a person’s creditworthiness. (So banks used this score to see if they can trust you enough to loan you some of their money)
When to pay off your card:
How to use a credit card:
Guide to Using a Credit Card Wisely
1. Understand Your Credit Card
Know your credit limit, interest rate (APR), and due dates.
Be aware of any annual fees, rewards, or cashback benefits.
2. Responsible Spending
Only charge what you can afford to pay off each month.
Keep your credit utilization below 30% of your limit.
3. Making Payments
Pay your bill on time to avoid late fees and interest charges.
Pay at least the minimum amount due, but aim for the full balance to avoid interest.
Set up automatic payments or reminders to never miss a due date.
4. Avoiding Debt and Interest
Avoid cash advances; they come with high fees and interest.
Understand how interest is calculated if you carry a balance.
If in debt, focus on paying more than the minimum each month.
5. Monitoring Your Account
Regularly check your statements for errors or fraudulent charges.
Sign up for account alerts to track spending and payments.
Report lost or stolen cards immediately to prevent fraud.
6. Building and Maintaining Credit
A good credit score helps with loan approvals and lower interest rates.
Keep old accounts open to maintain a longer credit history.
Limit new credit applications to avoid hard inquiries on your credit report.
By following these guidelines, you can use your credit card effectively while avoiding financial pitfalls.
7. Managing Credit Utilization
Credit utilization is the percentage of your available credit that you use.
Aim to keep your utilization below 30% to maintain a strong credit score.
Pay off balances frequently to keep utilization low.
Request a credit limit increase if needed, but avoid excessive spending.
Spread expenses across multiple cards to prevent high utilization on a single card.
Example if your credit limit is $1000 and you’ve spent 300 of your $1000 that would be (300/1000 = 30%)
If you’re unsure just take the credit limit you see on your card and divide by 30%. For example, lets say your credit card limit is $3400. You can use your phone calculator and divide it by 30%. ($3400/30% = 11,333). So you can only spend 11,333 for the month to be considered 30% of credit limit. If you go beyond that spend limit then you should pay it down. Going beyond that limit can be a risk and hurt your credit score.
The lower the percentage, the better ( so 30% is good but 20% is better, but 10% is even better, etc.)
If you find yourself going over the limit so lets say you spent 500/1000 (50%) then just pay it off before the statement balance. Or at least pay it down until it reaches 30% again and then pay the rest on the statement due date.
Tips to help you avoid mistakes:
1) If you know you are a forgetful person then maybe reconsider getting a credit card. Credit cards can be great but you have to be on top of things. Set a reminder on your phone. The last thing you need is to go into credit card debt.
2) When starting out choose a credit card with no annual fee (preferably one from the main bank institutions)
3) Don’t spend more than what you have in your bank account. Treat your credit card as if it’s a debit card.
4) Avoid paying your credit card late. Pay your balance off by the statement date. Set up autopay as soon as you get your credit card and specifically choose “statement balance” and not “minimum payment due”.
5) Check your credit card account periodically to make sure you’re on top of things like your spending. Don’t try to spend more than you have in your checking account.
