7 Best Ways to Use a Credit Card Effectively

Though the odds seem stacked in the credit card company’s favor, you can turn that around and use your cards to your advantage. When they’re used the right way, credit cards can help strengthen your credit history and boost your score. 

They can give you some interest-free float time, the period between when you buy something and pay for it, improving your cash flow situation. Plus, when you earn rewards, you’ll actually be profiting by using your card properly.

In this article, we’ll examine four ways to use your card: Building credit, earning rewards, paying down debt, and financing purchases. You’ll also receive some tips on how to use your card so you don’t rack up unnecessary debt or damage your credit.

1. Using a credit card to build credit

Most people’s first venture into the world of borrowing money involves a credit card. That makes credit cards their first chance to start building credit, so it’s crucial to understand what factors into a credit score (in order of importance):

  • Payment history
  • Utilization (how much of your credit is being used)
  • How long you’ve had credit
  • New credit
  • Credit mix (different kinds of debt you have)

Payment history and utilization are by far the two biggest contributors to your credit score, so these are the ones you really need to keep an eye on to create a positive credit history.

A secured card usually requires a cash deposit, which is often refundable, equal to the credit limit, and will serve as collateral. Unsecured credit cards don’t require collateral and are approved based on your creditworthiness. There are typically fewer application requirements for secured credit cards than for unsecured ones.

Both types of cards report their payment histories to the three major consumer credit bureaus. On the other hand, late payments will negatively impact your credit. Establishing a pattern of timely and full payments helps you establish a pattern of responsible borrowing.

2. Earn rewards

When used correctly, credit card rewards programs pay you money to use your credit card. You can earn cash and points toward purchases by simply using your card. The trick is to do this strategically, so it doesn’t end up costing you money. 

Step one involves knowing which kind of rewards you’ll actually use; if you rarely travel, for example, earning airline miles won’t be useful. 

Step two involves your spending habits; you want a rewards card that fits the way you already spend money. 

The third step is to choose a rewards card that doesn’t charge an annual fee (unless the rewards will greatly outweigh the fee). 

When you choose rewards cards that will really work for you, you can use them to pay your regular bills and make your regular purchases, so you earn money every time you buy something.

With hundreds of rewards cards to choose from, it can be tough to pick the right one. You can find some great advice and prescreened picks online at trusted websites like NerdWallet and Money Under 30.

Remember, rewards programs only work to your advantage when you only use the credit card for things you’d be buying anyway and you pay your balance in full every month.

3. Use all the credit card benefits

Credit cards offer more benefits than most people realize, far beyond rewards points. When you pay off your full balance every month, you can take advantage of all of these extra services for free. Common credit card benefits include:

  • Travel insurance
  • Baggage delay insurance
  • Travel accident insurance
  • Rental car coverage
  • Price protection
  • Theft protection
  • Extended warranties
  • Fraud liability protection

These extra benefits often get overlooked, but they can be very valuable for cardholders. Look through your cardholder agreement to see which of these benefits and protections come with your credit card.

4. Pay down debt

Since credit cards are one of the ways people can accumulate debt, it may seem counterintuitive to use them for purchases. Credit cards can actually help you pay off debt when used strategically – for example, by allowing you to take advantage of 0% introductory APR balance transfer offers.

There are several credit cards that offer balance transfers at low or no interest for an introductory period. You can save a lot of money by paying off high-interest debt before the promotional period ends.

Once you have reduced your debt with a credit card, we do not recommend making any further purchases with that card until you have paid off the balance completely. Also, be aware of fees. Balance transfer fees are sometimes charged by credit card companies when you transfer your balance from another card. Find a card with a low intro balance transfer fee if possible.

5. Finance a purchase

Since credit card interest rates are generally high, it is unlikely that you will be able to finance a purchase with a credit card. Having said that, a card with a 0% introductory APR can allow you to pay off a large purchase interest-free. Using a credit card to finance a purchase may be a good choice if you can pay off the balance in full before the intro rate expires.

Almost all credit card issuers offer a grace period, usually around thirty days of interest-free time between when you make charges and pay them. By spending mindfully and using your cards for only the things you would be buying anyway (like groceries and electricity), you won’t overspend and blow your budget. 

As long as you pay your balance in full before the grace period ends, you won’t pay any interest to the credit card company. 

This time gap can help you manage cash flow by adding more flexibility to your budget, but it only works to your advantage if you use your cards wisely. In most cases, you can choose your credit card payment date. 

Whenever you use a credit card, make sure you read the fine print carefully. When you use a credit card with deferred interest, you could be charged interest if you don’t pay off your balance before the promotion ends. Depending on the card, interest may only be charged on the remaining balance, but it could still add up over time.

Pick a date that comes a day or two after your paycheck hits your checking account so you’ll be sure to have the funds needed to cover your credit card bill.

6. Don’t Pay The Minimum

By paying credit card interest of $50 a month you’ve lost the opportunity to invest that money: Invested at 6 percent, $50 a month would total more than $57,000 in thirty-two years, the time it would take you to pay off a $2,500 balance at an APR of 19 percent (the average new credit card rate in 2020) if you never use the credit card again and make only the minimum payment. Plus, in that time you would pay more than $7,300 in interest charges.

Most credit card companies calculate minimum monthly payments at 1 or 2 percent of the balance due, including interest. If you made a purchase of $2,500 at an annual interest rate of 18 percent, it would take you more than twenty- seven years to pay off the balance by making only the minimum monthly payment. Here’s how that works: Initially, 2 percent of your balance would give you a minimum payment of $50, with around 75 percent, or $37.50 ($2,500 × 18 percent ÷ 12), going toward interest, and only 25 percent, or $12.50, reducing the amount you borrowed.

By the time you paid off the $2,500, you would have ended up paying interest of $5,897 in addition to the $2,500 principal you borrowed. Your $2,500 item will have cost you $8,397. How can you ever get ahead financially if you’re paying such exorbitant prices?

Paying any amount more than the minimum payment—even just $5 extra— can shave years and thousands of dollars from that payoff. Whenever possible, try not to use credit cards for purchases you can’t afford to pay in full right away.

7. Using credit cards strategically

If you’re not careful with how you use your credit card, you may incur high-interest charges, increase your debt, and negatively impact your credit rating. You can keep your budget and financial health in check by following these tips.

  • Make your payments on time. The number one rule in building credit is to make every payment on time. Even one skipped payment can tank your credit score and stain your credit history for years to come. By only using your credit card to buy things you can afford and always making payments on or before the due date, you’ll be well on your way to establishing a favorable credit history and top credit score. Use whatever tricks you need to in order to make sure you’re never late with a credit card payment. Mark it on your calendar, set a reminder on your phone, or set up scheduled payments from your checking account for at least the minimum payment due.
  • Pay your credit card bill on time and in full every month. Paying off your balance on time and in full can help you avoid incurring high-interest charges. Pay at least the minimum payment on time if you are unable to pay the full statement balance. 
  • Do not buy anything that you cannot afford to pay for in cash. In this way, you can avoid overspending and stay on budget each month. 
  • Don’t go over your credit limit. In calculating your credit scores, one factor is the credit utilization ratio – the ratio between your total credit card balances and your total credit limits. Low ratios have a favorable effect on credit scores, while high ratios have a negative effect. Maintain a credit utilization ratio of no more than 30%.

Final Words

It has many advantages to keeping a credit card in your wallet, but there are also risks involved. 

Credit cards provide many benefits, including building a good credit history, acquiring rewards on everyday purchases, paying off high-interest debt, or obtaining interest-free financing if used well. 

The trick to enjoying these benefits while maintaining a healthy credit card use is to use them to pay for purchases that you would have made anyway, pay your bills on time every month, and keep your credit utilization rate low.

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