Credit Cards - Pulling a credit card out of wallet for shopping, spending, purchasing, credit rating

How to use a credit card 

Using a credit card is easy. You just go to the store, find what you want, take it to the register and then swipe the card. Easy peasy right? Wrong. If that’s all it took to use a credit card no one would have issues with credit cards. While it is the way to make a purchase with a credit card, that’s not what we’re talking about. Using a credit card is so much more. The way you use your credit card is determined by a couple of things: your goals and your constraints. The most important thing to remember is that a credit card is not free money. You can use it to purchase things that you can’t currently pay for, but doing so very often can get you into financial trouble and is a really bad idea.

The best way to use a credit card

Regardless of any other things that you do with your credit card, the best way to use a credit card is tfor purchasing things that you need and then paying the statement balance in full. Do not just pay the minimum amount due when you get your monthly statement. Paying the balance in full keeps you from going into debt. In order to do that you need to budget just like you’re spending cash. If you don’t, you’ll spend more money than you have available. That leads you into debt which is not your goal.

What are the ways to use a credit card

There are a few different ways that you can use a credit card for personal gain.

  1. To build your credit
  2. As a simple payment tool
  3. To earn rewards
  4. To cover an emergency expense

How to use a credit card to build your credit

Most people do not think of credit cards as tools to build their credit, but in fact they are uniquely qualified as a form of credit to help you build credit. There are multiple reasons for this. First, if you pay your balance in full every month you don’t have to pay interest. Using any other credit instrument to build credit requires interest payments.

Second is credit to debt ratio or credit utilization.  This is your available credit (how much a credit card company has approved you to spend) divided by your current outstanding balance (how much you have spent without repayment). This credit utilization rate is a major factor in your credit score. When you show that you owe far less than you could, it means that you have available credit. You aren’t stretching your budget and you are in a good position to pay your bills. That means you’re likely to repay your debts and therefore you have a good credit score.

Third, because credit cards are open-ended you can keep them open for indefinitely. This matters because another factor in your credit score is your age of credit. When you have accounts that have been opened for years or decades this shows stability. This high age of credit is a very strong indicator that you can use and maintain your credit. You would never want to do this on a loan other than a mortgage. However, on a credit card you can keep it and use it for 20 years, never paying interest but always making a payment. This is a great foundation for your credit score. So if you want to build your credit with a credit card here’s how you can. 

Step 1: 

Look through your budget and find one recurring charge, something that you need or want and you pay for every month. Maybe a streaming subscription, maybe your water bill. Maybe a professional subscription that you need for your job. Anything like this will do as long as you know when it’s going to be and roughly how much it’s going to cost. 

Step 2: 

Pay this recurring charge with your credit card.

Step 3: 

Pay your credit card in full every month, i.e. the same amount you’re currently paying from your bank account directly. 

There is no step 4

It’s that easy!  By generating this charge and payment you are not paying any fees. You are building a history of on-time payments in your credit report and that is the key to your credit score. What’s even better about this is? You don’t have to do this with just one credit card, you can do this with three, four, or even five credit cards. And you don’t have to carry the card around with you. You don’t need to use it for anything else (and you probably shouldn’t). Best of all, you don’t have to worry about going into debt. Your building credit and your credit score by paying your necessary bills. And you can leverage that credit in the future to buy a house, a car or another major purchase at the best rate possible!

How to you use a credit card as a payment tool

Credit cards are above all else a tool for making payments. Today many purchases are made online and therefore cash cannot be used. A debit card could, but debit cards are less secure and leave you liable for fraudulent charges that ar. Credit cards do not have this issue. While you do need to keep them secure and pay attention to what you’re doing, using them online is not as risky as using a debit card.

Almost all credit cards come with zero fraud liability so if your card is stolen when it’s used online, you will not be held accountable for the charges that someone else made. That’s why using a credit card as a payment tool is very valuable. When you’re doing this you should still treat it like it’s a debit card. Make sure you have the money in your bank account to pay for whatever you’re charging on your credit card. 

To help you make sure you have these charges covered you may even consider opening a savings account. Then every week go into your checking account and transfer to your savings account the amount that you have charged on your credit card. This way when you’re looking at your bank account you don’t think you have more money than you actually do. It’s a little more work than using a debit card but it provides security that you otherwise wouldn’t have. Plus you have the credit card and your building credit.

How to use a credit card to earn rewards

Using a credit card to earn rewards requires two key things. First you need a good budget. You have to know how much you are able to spend each month. Then you can plan accordingly. Second, you need the right rewards card. If you like to travel you need to pick an airline miles card or a hotel rewards card. Something that gives you a bonus that you can really use. If you just want cash back or discounts, pick a card that really does well in those items. Check out our different links for the best cards for each of these categories.

Once you have a good budget and the right card it’s easy to know how much money you are allocating to spend each month. You can spend everything you want on the credit card then pay the balance in full before the due date. One thing to remember is that you should have a credit limit that is 3 to 5 times higher than the amount that you spend each month. This is important. At any given time your balance could be as high as two times your monthly spend. That’s because of the timing of bill payments. You don’t want to go all the way to your credit limit. That can be seen as a negative credit factor.

This type of credit card usage requires as large a credit limit as possible. The reason is not to spend more but card to keep your credit utilization down. It’s helpful for your credit score regardless of the fact that you pay the balance in full each month.

How to use a credit card to cover an emergency expense

Covering an emergency expense is one of the most valuable things that a credit card can do for you. Well, we all would love to have savings that can cover any extraordinary expense. Sometimes it’s just not possible and sometimes you get hit with two, three, or four extra expenses and simply can’t manage to keep all of that in savings.

More importantly, who wants to keep thousands of dollars in a savings account just in case. You would be better off investing that money. But investing means that it could take a couple months to access your money.

This is where a credit card comes in. If an emergency expense comes up that you can’t cover with your standard paycheck and checking account balance you can use the credit card as a short-term emergency payment to cover your needs. Then you can get into your savings or investment accounts and use that to pay off the balance.  This is a much cheaper safety valve than using a payday loan.

If you don’t have money available in an investment account to pay the emergency expense after you’ve charged it to your card then you can treat it like a loan. Determine how much money you can pay towards that credit card expense every month and pay it until you have the bill paid off. This is not a bad thing. The reason to have credit is so that when an emergency happens you can cover it and move forward with minimal disruption to your life.

Use different credit cards for different reasons

You may want to have credit cards for multiple reasons and that’s okay. In fact, I suggest having three or more. You can use a couple to build your credit and these can always be held in reserve in case of an emergency expense. Have another card to use for purchases whether it’s just for a payment tool when you need to buy something online or to make all of your purchases for the rewards program. As long as you’re making your payments monthly and managing your money wisely, credit cards are a fantastic vehicle for managing finances and building credit.

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Nathan Foley