Getting approved for a new credit card is an exciting moment; freshly equipped with a powerful tool that can help you build credit, earn rewards, and make major purchases with ease, the temptation to use it for anything and everything can be hard to resist. While there are plenty of reasons you might want to use your credit card, keep in mind that the convenience comes at a cost – when used irresponsibly, credit cards can put you in a striking amount of debt much faster than you might expect.

The Best Way to Use Credit Cards: Building Credit

Whether you’re new to using credit or looking to improve your existing credit, credit cards are the most common tool people use to build or rebuild their credit. Below you’ll find some tips on how to use credit tactically to stay out of debt; be sure to follow these best practices to keep your finances and credit as healthy as you can.

Keep Your Balances Low

Keeping a low balance on your credit cards can make it easier to pay balances in full and reduce the amount of interest you have to pay each month.

Use Less than 30% of your Credit Limit

Credit utilization is the ratio of your credit card balance to your credit limit, and it’s a key factor in how FICO determines your credit score. Using less than 30% of your card’s credit limit is essential for maintaining a good credit score.

Pay Your Bills on Time

Paying bills on time ensures that you won’t incur any late fees or take hits to your credit score due to missed payments.

Pay More than the Minimum Due

The lower the balance that remains on your card each month, the less interest you’ll have to pay on the money you borrow. The best way to avoid costly interest payments is by paying your balance in full each month, but that isn’t always an option; just know that the more money you put towards an outstanding balance, the less interest you’ll have to pay in the long term.

Monitor Your Credit Card for Fraudulent Charges

Fraudulent charges can quickly rack up alarming amounts of debt on your credit cards. By consistently monitoring the activity on your cards, you’ll be able to identify fraudulent transactions more quickly. Today, many cards offer settings where creditors will contact you if they suspect fraudulent activity on your account; take advantage of this feature for an added level of security.

Store the Card for an Emergency

The age of your oldest credit card account is factored into your credit score, so keeping an open account could help you build credit in the long run. By storing your card for emergencies only, you’ll always have at least one account open.

Other Times to Use Credit

While you should primarily use credit cards as a credit-building tool, there are other times when it can be a good idea to use credit, like paying off debts or financing large purchases you can’t afford to pay in cash. However, and this is a big however – this is only recommended if you have a credit card with a very low APR, close to or equal to 0%. Higher interest rates/APRs mean higher borrowing costs, and you want to keep as much of your money for yourself as you can, right?

If you have a good credit score, financial institutions may offer you cards that have introductory 0% APR promotions; essentially, for a given number of months (usually 6 to 18), you won’t be responsible for making interest payments on any of the money you spend on the card.

There are two strategic ways you can make the most of this deal:

  • Transfer existing debts into the 0% APR account and pay them off (aka balance transfer)
  • Break a major purchase into smaller, more manageable payments that you’ll pay in full over the intro APR period

Pro tip: If you find yourself fortunate enough to be approved for a 0% APR credit card, it’s wise to monitor your spending closely – you could be left with substantial interest payments to make if you’re unable to pay your full balance before the intro APR period ends.

An Important Note on Rewards Programs

Many credit card companies offer rewards in the form of cashback, discounts on purchases, and free airline miles to entice consumers to use their card. Earning rewards with a credit card can be a good reason to use your credit, but only on one, very strict condition: you can pay your balance in full each month. Why?

Cashback rates generally range anywhere from 1-5%, while average APRs hover around 15%; if you’re carrying a balance on your card but keep spending to earn rewards, understand that you’ll be paying much more in interest than you could ever earn in cashback. Research suggests that these types of reward programs encourage overspending and can cause people to fall into debt, so you’ll have to monitor your spending closely if you want to use these benefits wisely.

When Not to Use Your Credit

Credit cards are a convenient, accessible payment method that can help you build credit, but their convenience can prove risky to new users who don’t set a spending limit or have a plan for paying off balances they can’t afford to pay in cash. Using credit irresponsibly can quickly put a borrower into credit card debt, which could negatively impact their credit scores and other aspects of their financial health. In order to prevent this, here are a few examples of situations where you should avoid using your credit card.

When You Can’t Afford to Pay for the Purchase in Cash

Using credit cards to pay for purchases you can’t afford to make in cash is a dangerous habit if you don’t have a detailed repayment plan. Continuously carrying large revolving balances on high-interest credit cards could lead to interest payments that cause you to spiral into debt before you know it.

Making Purchases Without a Repayment Plan

Having a repayment plan is essential, especially if you’re making purchases you can’t afford to pay in cash. Without considering how to pay off outstanding balances and implementing a spending limit, your risk of falling into additional debt is high.

When the Balance is Close to the Credit Limit

Making purchases on a credit card when the balance is close to the credit limit can be risky; not only could this raise your credit utilization to a level that harms your credit score, but you could also be placing yourself at risk for being denied future credit.

To Earn Rewards While You Have a Revolving Balance

Cashback, free airline miles, and discounts on purchases are great incentives, but if you have a revolving balance on a card and continue using it to collect rewards points, the amount of cashback you’ll receive will pale in comparison to the interest payments you’ll have to make. Simply put, you’re accumulating debt with very little return on the money you spend.

Large Impulse Purchases

Large impulse purchases could put you in jeopardy of acquiring large amounts of credit card debt, which could lead to a decreased credit score.

Pro-tip: If you know you struggle with self-control when it comes to spending, try implementing a “sleep on it” rule before making any major purchases. By giving yourself at least 24 hours to consider whether you really need an item or if it’s simply a fleeting want, you can cut back on impulse spending significantly.