Using Credit Responsibly: A Beginners Guide

Using Credit Responsibly: A Beginners Guide

Have you considered getting a credit card to build credit, but haven’t because you’ve seen someone get sucked into credit card debt? It’s hard to build credit when credit cards seem to only be good...

Have you considered getting a credit card to build credit, but haven’t because you’ve seen someone get sucked into credit card debt? It’s hard to build credit when credit cards seem to only be good for getting into debt. Building and using credit wisely doesn’t have to be scary, but it does take discipline.

Keep reading to get a better understanding of your credit score and credit report, as well as tips on how to use credit cards safely.

Understanding Credit Scores

Your credit score is a number that helps lenders determine your creditworthiness or the likelihood that you’ll repay borrowed money.

This three-digit number is an important part of borrowing money to buy a house, a car or some other major purchase. Credit scores are often also used when you apply to rent an apartment or set up utilities.

Most scores go from 300 to 850, and the higher your score, the better. A higher score gives you access to better credit terms, like lower interest rates.

The factors that make up your credit score include:

  • Payment history: This is the biggest part of your credit score. Lenders want to know that you pay back the money you borrow on time. That means late or missed payments can hurt your score.
  • Total amount of debt: The more money you borrow, the more likely you may not have the funds to pay it all back. This includes your lump sum of debt, as well as how many different accounts you owe money on.
  • Length of credit history: A person who’s been borrowing money and repaying it on time for years looks like a safe bet for a lender.
  • Types of accounts: Using different types of credit accounts can show that you’re a responsible borrower. For example, you might have a credit card, mortgage and auto loan.
  • New accounts: Opening new credit accounts (or applying for new accounts) may make it look like you’re in financial trouble and need to borrow money to stay afloat.

Why Use a Credit Card?

Credit cards are one of the most common types of credit accounts. They’re often easy to obtain and use.

However, they can sometimes be too convenient and are known for sinking people deep into debt.

Since getting into credit card debt is so easy, why use a credit card at all?

There’s actually a surprising number of advantages to using credit cards over cash or debit cards, including:

  • Credit cards come with higher security than cash. Cash can be stolen and used without any chance of you recouping the loss. If your credit card is stolen, you can report it and your credit card company will lock your card.
  • You can protect yourself from fraudulent purchases with a credit card. You can report fraudulent charges and have them removed. You won’t be responsible for the cost of the fraudulent purchases, and any money compromised comes out of your credit balance, not your bank account.
  • Many credit cards come with rewards. This means you get cash back, travel miles, points or other rewards when you use your card. Unlike cash or debit cards, using a credit card could help you recoup the cost of your credit card purchases.

Is it Possible to Use Credit Responsibly?

The key to using credit responsibly is to not spend more than you can afford to pay back in one pay cycle. Credit that uses a fixed payment, like a mortgage or car loan, can be easier to use responsibly.

Credit cards, on the other hand, can sometimes be difficult to use without overspending.

Follow these easy tips to help you use your credit card wisely and avoid putting yourself into credit card debt.

Understand Your Terms

Be sure you carefully read the terms and conditions before signing up for a credit card. For example, most credit cards have high interest rates but some give you a lower introductory rate.

You’ll want to make sure you understand when your introductory rate ends and pay off your balance to avoid paying a higher interest rate. The same can be said for any late payments you make. Many cards will end the introductory period early if you miss a payment for any reason, leaving you with a higher interest rate.

Treat It Like Cash

The best way to use a credit card is to think of it as a debit card or cash. Only put purchases on your credit card that you have the cash to cover. This lowers your chances of overspending and not being able to make your payment.

Pay At Least the Minimum

Credit card companies require you to pay a minimum percentage of your balance each month. This is known as your minimum payment. By making at least the minimum payment each month, you’ll avoid late fees and penalties. However, you’ll still have to pay interest on any remaining balance, which can lead to a much higher repayment amount in the end.

It’s even better if you can pay off your credit card balance in full, or pay more than the minimum each billing cycle. This helps you cut down or even eliminate interest charges, potentially saving a lot of money while keeping your account active and positively affecting your credit score.

Make On-Time Payments

Missed and late monthly payments hurt your credit score. Plan to make your credit card payment on time each month to avoid fees and help build your credit score. You can even set up automatic payments so you don’t have to worry about missing a due date.

If automatic payments aren't possible, or a comfortable prospect, setting a payment reminder on your phone or in a calendar can also help.

Choosing the Right Card for You

Credit card companies give you lots of options when it comes to rewards and other credit card features.

Finding the right card is an important step in responsible credit card use. You want to choose a card that has a specific purpose.

Having a bunch of different credit cards and no plan for them is a good way to end up with credit card debt.

Common types of cards include:

  • Travel cards: A travel credit card usually rewards you with travel miles for each dollar you spend on the card. Travel cards can be a good way to get extra perks when planning for a trip. Be aware that many travel cards come with an annual fee. 
  • Rewards points: Rewards credit cards usually earn points when you use the card. These points can be cashed in through your rewards program for goods or gift cards. 
  • Cash back: Perhaps the best credit card reward is cash back. Cash back cards are simple—you get a certain percentage of cash back for each dollar you spend. You can redeem your earned cash back as a statement credit to lower your monthly credit card bill or get the cash paid to your bank account. You may need good credit to get a cash back card.
  • Student cards: Many credit card companies offer cards for new borrowers and college students. Student cards often have a lower credit limit, or less available credit, to help you minimize overspending. Be sure to read the terms carefully; not all student cards are created equal.

Traditional Credit Card Alternatives

You don’t have to get a regular credit card to build credit.

Today, there are lots of alternatives that give you the benefits of a credit card with a lot less risk, such as:

  • Secured credit cards: A secured credit card works just like a regular card, but it requires a security deposit. Your security deposit becomes your credit limit. If you miss a payment, your credit card issuer pays your bill using your deposit.
  • Prepaid cards: A prepaid card lets you load money and use it as a traditional credit card. You won’t be able to spend more than the amount you pre-pay.
  • Limited credit cards: These cards let you use them as a regular credit card, but only for certain purchases. For example, you may have a card that can only be used for approved bills, such as your monthly cell phone bill.

While it can be scary when you’re starting out, learning to use credit responsibly helps build good personal finance habits for a secure financial future.

Additional Credit Resources

  • Credit Score 101
  • Credit Report vs Credit Score
  • Does Buy Now, Pay Later Affect My Credit Score?
  • How Do Credit Cards Work?
  • Possible Credit Archive

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