Basic Tips to Use Credit Cards Wisely

Woman using credit card


Carlina Teteris / Getty Images

It's important to learn how to use a credit card wisely so you can avoid costly mistakes. That includes finding out how to choose the right card for you, understanding transactions, rewards, fees, and interest, avoiding debt and fraud, and more.

The Basics of Using Credit Cards

Credit card issuers make a certain amount of credit available for you to borrow from over and over—which is known as revolving credit. All you have to do is stick to the terms of the credit card agreement. That usually means paying on time, staying within your credit limit, and not using your credit card to commit fraud or purchase illegal things.

You must repay purchases made on your credit card, but the credit card issuer gives you option to repay your balance over time. You can keep using your credit card even if you have a balance, as long as you have enough available credit. For example, if your credit limit is $1,000 and your current balance is $400, you still have $600 in credit available for future purchases.

If you choose to pay over time, you'll have to make at least minimum monthly payments by the due date each month. Otherwise, you'll face penalties for any late payments. In addition, you'll pay interest on any balance you pay over a period of time.

Choosing the Right Card

There are so many credit cards on the market with different fees, interest rates, rewards, and other perks. It's worth taking some time to choose the right one for yourself.

Decide What You Need

Make a list of your needs to help you figure out the type of card to choose. Do you want to pay off a balance at a lower interest rate, earn rewards on purchases, make a large purchase and pay no interest, or start building or rebuild your credit?

These are the major types of credit cards you can choose from:

  • Standard credit cards are basic cards that generally don't offer any special rewards or benefits.
  • Rewards credit cards pay cash back, miles, or points rewards on your purchases. Balance transfer cards offer a (temporary) low introductory rate on balances you transfer to the credit card.
  • Low-interest-rate cards offer a low introductory rate on purchases. (Some credit cards offer the low rate for both balance transfers and purchases.)
  • Premium credit cards offer higher rewards and other luxury perks. These credit cards typically charge a high annual fee.
  • Student credit cards are geared toward young adults enrolled in an accredited four-year college or university.
  • Retail credit cards can only be used for purchases from a specific retail store.

Check the Fees and Interest

Narrow down your options and review the credit card pricing to get an idea of how much it will cost. If you choose a credit card with an annual fee, make sure the benefits are worth it.

Compare Similar Cards

Compare the interest rates, fees, rewards, and perks of credit cards from various credit card issuers. You can view credit card terms online at each credit card issuer's website or by using a credit card comparison website.

Know Your Credit Rating

Once you've chosen a card, you can complete the credit card application online and find out whether you're approved within minutes. But before you apply, you should know your credit score.

Your credit history will play a major role in your ability to be approved for a credit card. You'll typically need a higher credit score to qualify for rewards credit cards, those with promotional interest rates, and premium cards.

Credit Cards and Your Credit Score

Your credit score is a number that summarizes the information in your credit report. Many creditors and lenders use your credit score to decide whether to approve your applications and to set your pricing.

Most major credit card issuers send updates to the credit bureaus, the companies that compile and maintain credit report information. So how you use your credit card will directly influence your credit score.

The two best things you can do for a good credit score are keeping a low balance and making your credit card payments on time each month. 

Understanding Fees

Credit cards may come with a number of fees. You may be able to avoid some of them depending on how you use your card. Common credit card fees include:

Annual Fees

This is a fee charged once a year to your credit card account. Some credit cards waive the annual fee in the first year, and some don't charge them at all.

Late Fees

Credit card issuers charge a late fee if your monthly payment is less than the minimum or received after the due date.

Balance Transfer Fees

When you transfer a balance from another credit card, you'll be charged a balance transfer fee that's flat rate or a percentage of the amount transferred.

Cash Advance Fees

If you use your credit card to withdraw cash against your credit limit, you'll be charged a cash advance fee. The cash advance fee can be a percentage of the amount of your advance or a flat fee.

Finance Charge

When you carry a balance on your credit card, you're charged interest in the form of a finance charge.

Foreign Transaction Fees

This is a fee for making purchases in other currencies. The fee is typically a percentage of the transaction amount. Some cards don't charge this type of fee at all.

Types of Transactions

Most credit cards allow you to make three kinds of transactions: purchases, balance transfers, and cash advances.


Whenever you use your credit card to buy something, you're making a purchase. The vast majority of your transactions will likely be purchases, which can be made in person, online, or by phone.

Balance Transfers

balance transfer involves transferring a balance from one credit card to another. You might transfer a balance to take advantage of a lower interest rate or to consolidate your credit card balances.

Cash Advances

Cash advances are made when you use your credit card to withdraw cash from an ATM. Cash equivalent transactions may also be treated as cash advances. This includes things overdraft protection transfers and the purchase of money orders or wire transfers. It's best to avoid taking out cash advances on your credit card since they're so much more expensive than other types of transactions.

Understanding Interest

Credit card issuers charge interest on your credit card transactions. The interest rate is expressed as an annual percentage rate, or APR. Your credit card usually has different APRs for purchases, balance transfers, cash advances, and penalties. Some cards also offer introductory APRs.

Interest is charged to your credit card in the form of a finance charge, which is calculated based on your balance (or your average daily balance) and your APR. The original interest rate on your credit card is often tied to your creditworthiness. Generally, the better your credit, the lower the interest rate you'll receive.

Earning Rewards

Rewards credit cards pay an incentive on your credit card purchases. You can accumulate rewards and then redeem them for cash back, travel expenses, gift cards, and merchandise.

Many rewards credit cards grant more rewards for certain types of purchases. For example, a travel credit card might pay more rewards on flights and hotels.

It's important to know the terms of your rewards credit cards: The amount of rewards you earn on purchases, minimum redemption amounts, any expiration date on rewards, and things you can do to forfeit your rewards. For example, if you fall behind on your credit card payments, you can lose the rewards you've accumulated.

Managing Your Credit Limit

Most credit cards come with a credit limit: the maximum amount you're allowed to spend on your credit card. Your limit is based on your credit history, income, and the type of credit card you've applied for.

Staying within your credit limit allows you to avoid penalties and to keep your account in good standing. In addition, keeping your credit card balances low relative to your credit limit is better for your credit score.

Your credit card issuer may automatically increase your credit limit periodically as you use your account responsibly and your income increases. You can also request a credit limit increase from your credit card issuer if it's been several months since you received your last increase.

Reading Your Billing Statement

Each month, you'll receive a paper or electronic billing statement that includes all the transactions made to your account within the billing cycle. The billing statement also lists your outstanding balance, your current minimum payment, and the due date.

Don't take for granted that everything on your credit card statement is accurate. Read through each transaction on your card to be sure that your last payment and any other credits were applied correctly, you were charged the right amount for all your purchases, and there are no unauthorized transactions on your credit card.

If you find any errors on the statement, you have the right to dispute the error with your credit card issuer. You can also report any unauthorized charges to your credit card issuer so they can be removed from your account.

Making Payments

Under your credit card agreement, you're required to make a payment each month. Unless you have a charge card (which requires that you pay your balance in full), you're only required to make the minimum payment. The minimum payment is only a small percentage of your outstanding balance and is usually easy to make.

Even though your credit card issuer only asks you to make the minimum payments, it's typically better to pay more. With minimum payments, your balance only goes down by a small amount each month because a large portion of the payment will be applied to interest. This increases the amount of time it takes to pay off your balance. Ideally, you should pay your balances in full each month.

It's important to make your credit card payment by the due date each month. Otherwise, you'll be charged a late fee for any payment not received by the due date. If your payment is more than 30 days late, it will usually affect your credit score.

Closing Your Account

Closing your account can be as simple as making a phone call to your credit card issuer, but there are some things you should know before you take action. Closing a credit card can hurt your credit score for a couple of reasons.

First, it can impact your credit utilization ratio, which is the amount of credit you're using compared to what's available to you. Closing an account will lower the credit available to you, which can raise your utilization score. Generally, a utilization ratio of more than 30% will negatively impact your credit score.

Closing an account can also lower the overall age of the accounts in your credit history, which is another factor in determining credit scores. Generally, the older your accounts the better, so you don't want to close any of your oldest credit cards unless it's absolutely necessary.

If you want to close a credit card, it's best to pay off your balance first. But if you keep a balance on it, then remember that your monthly payments are still due. You can still suffer the same consequences of a late payment—late fees, increased interest rates, and credit reporting—when your account is closed.

Avoiding Debt

Because you're borrowing money when you use a credit card, there's a possibility of getting into debt. Paying off debt can take several years, thousands of dollars, and lots of sacrifice. It's much easier to be proactive and stay out of credit card debt.

The key to avoiding credit card debt is to make a habit of charging only what you can afford. This way, you can pay your balance in full each month. An as long as you're paying off your credit card balance, you're staying out of debt.

Once you can't afford to pay your full balance, it's time to rein in your credit card spending until you can pay it off. If you start using your credit card to fund a lifestyle that's above your means, you risk getting into debt.

Dealing With Fraud

Simply having a credit card puts you at risk of becoming a victim of credit card fraud. Hackers can steal your credit card information from businesses where you've used your card. They're becoming cleverer at skimming credit card information from gas stations and other businesses. And, they can trick you into giving up your credit card information by posing as your bank or another company you do business with.

You can prevent credit card fraud by protecting your credit card information. Also, monitor your credit card transactions by creating an online account with your credit card issuer. This way, you can review your credit card transactions frequently to spot any suspicious charges.

If you spot unauthorized charges, let your credit card issuer know right away so the charges are removed, the account can be closed and you can receive a new credit card. Most credit card issuers have zero fraud liability policies that will keep you from being liable for fraudulent charges made on your account. Many credit card companies will also try to prevent fraud on your account by declining unusual purchases until they verify that you're the one who's attempting the transaction.