Credit cards can come with a lot of perks and benefits, but it’s important to understand how to use a credit card wisely.
Not doing so can be a huge financial pitfall! Don’t let it deter you from considering if using credit cards is right for you or not, though.
As long as you’re following these simple rules, you’ll be on your way to building good credit and reaping the benefits of credit card bonuses while you’re at it.
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Table of Contents
1 Never spend more than you would if you were paying cash
For some people, having a credit card can be a huge temptation to make purchases you can’t actually afford.
Unless you find yourself in an emergency situation and don’t see any way around it, never spend more on your credit card than you would if you were using cash for the purchase.
This is responsible credit card usage and the best and only way to keep yourself from quickly getting into credit card debt.
That’s a vicious cycle that can be extremely hard to break, so make this a strict rule for yourself and don’t break it.
2 Always pay off your monthly statement
If you’ve followed the first rule, you shouldn’t have any trouble with this one. This is important because any time you don’t pay your balance in full you’ll end up paying interest on what you owe.
Most credit card companies charge interest rates between 17%-24%. That means if your balance is $1000, you’ll accrue an additional $170-$240 if you don’t pay it off in full.
Be sure you understand how credit cards work and know what happens if you’re only making the minimum payment.
With that kind of interest being tacked on to your credit card balances, you can quickly find yourself in a heap of debt. Another goal is to build up your savings so even if you have a month where you overspent, you are still able to pay off your credit cards in full each month.
Avoid interest charges and pay your statement off every month.
3 Make your payments on time
Not only will you be charged credit card interest if you fail to pay off your balance in full, you’ll also be charged a late fee if you don’t pay it on time.
The average late fee for a credit card is $36, even if your balance is only a few dollars.
Nothing stings quite so much as having to pay an extra $36 because you forgot to pay off that $5 Starbucks drink you charged on your card.
There are two ways you can easily avoid late fees. One would be to set up automatic payments that come right out of your checking account.
Obviously only do this if you’re certain you’ll have enough in your account to cover it. The second is to set up reminders in your calendar so you can’t forget.
I set mine for five days before the due date, with another reminder set for two days before, just in case I turned off the first one and still forgot to do it.
Better safe than sorry!
4 Choose your credit cards wisely
Not all cards are created equally and you’re definitely going to want to do some research before opening any cards.
Since we talk a lot about earning points and miles on this blog, I’ll focus more on those for now.
If you’re just starting out, the Chase Sapphire Preferred is a great card to get.
At the time of this writing, Chase is offering 100,000 Ultimate Reward bonus points once you meet the minimum spending requirements of 4K within three months of opening your account. (*Note: the bonus has since dropped down to a lower amount, but I’ll keep this here as an example.)
That 100K in rewards points is worth $1250 cash or possibly even more when used to book free travel.
Compare that with a department store credit card where you’ll be offered something like 15% off your purchase if you open a card right then.
There’s no comparison in how valuable the Chase card is over the department store card.
That doesn’t even take into consideration any other benefits it comes with or the additional points you’ll be earning with every new purchase.
Even if it sounds tempting at the moment to save a little cash on whatever you’re buying, it’s rarely going to be a good idea to open a department store credit card.
(Read more below about the 5/24 rule.)
5 Keep an eye on your credit utilization ratio
Your credit utilization ratio actually has an effect on your personal credit score, so it’s worth knowing how to keep an eye on it. If you only have a couple of credit cards, this shouldn’t be hard.
However, if you start opening more accounts, you might want to use some sort of spreadsheet to track your credit ratio.
If you’re paying off your balance each month, this shouldn’t be a problem, but ideally, you’ll want to keep your credit utilization ratio at or below 30%.
What is credit utilization ratio? This is the percentage of credit allowed that you’re currently using.
For instance, if you have a total of $10,000 max credit on all your cards, try to keep your charges at or below $3,000.
Even if you have the available credit, it can hurt your credit score to actually use it all.
6 Be aware of the 5/24 Rule
Although not all credit cards are issued by Chase Bank, many of the best ones are. They have a strict 5/24 rule you absolutely have to be aware of.
The 5/24 rule means you can only open five personal credit cards by any card issuer within a 24 month time period.
Even if you open a personal card owned by a bank other than Chase, it’ll show on your credit report and will still be counted.
Some exceptions to this include American Express credit cards. (American Express charge cards are different and do count.)
Also, business credit cards don’t count against this number. This is great if you’re wanting to do things like combine points on a personal and a business card to earn the Southwest Companion Pass.
(If you’re not familiar with that, definitely look into it!)
7 Keep your oldest credit cards open
Having a strong credit history is an important part of getting/keeping a high credit score.
That’s why you’ll want to keep your oldest cards open, even if you don’t use them on a regular basis.
Beyond just keeping your oldest cards open, be careful about churning cards too soon. Even if you’re only opening a card to earn the sign up bonus points, there are options to consider before closing a card completely.
Consider downgrading your card to another product, preferably one with no annual fee, so that you’re not making a negative impact on your credit score.
Recap: How to use a credit card wisely
Keeping a healthy relationship with your credit card accounts is very important. Even as we rave about the awesomeness of earning free travel using credit card points, we want to always make sure our readers understand the seriousness of following these rules.
Knowing how to use credit cards wisely is even more important than knowing how to use points for travel.
After all, it’s not worth getting a card with a great sign-up bonus so you can book free flights and hotels if you’re going to end up spending your hard-earned money on late fees and interest payments.
Remember, if you can’t pay cash for it, never charge something on a card simply to earn more points!
Here’s a recap of the seven tips:
- Never spend more than you would if you were paying cash
- Always pay off your monthly balance
- Make your payments on time
- Choose your credit cards wisely
- Keep an eye on your credit card utilization
- Be aware of the 5/24 rule
- Keep your oldest credit cards open
You may also want to read 5 Tips to Improve Your Credit Score.
Using credit card sign up bonuses
If you’re comfortable using credit cards to earn points and miles and know how to use a credit card smartly, you’ll be able to use them to book free and nearly free travel.
We’ve saved thousands of dollars and taken some amazing trips thanks to credit card sign up bonuses.
Be smart with your credit cards and you can do it, too!
Till next time,