Feb 7th, 2007

How to Use a Credit Card Responsibly

By David Weliver

Maybe you just got your first credit card, or are retraining yourself to use credit responsibly after beating down some debt.

Personal finance writers, myself included, love to focus on credit card abuse and the difficulties it can cause. But credit cards are also a powerful tool that can make managing your money easier.

Before you can use a credit card responsibly, you should understand how credit cards work. In short, the credit card is a tool you can use to receive a loan from the card’s issuing bank every time you make a purchase. The bank is happy to make this loan to you because it expects to collect interest. In fact, banks like credit cards because they can charge a much higher interest rate than they could on a secured loan.

However, the responsible credit card user typically has an advantage over the credit card bank called a grace period. Typically between 20 and 30 days, the grace period is the time period between when you make a purchase and when you pay your credit card company for that period in which no interest is charged.

Grace periods are powerful because they give you the opportunity to use your credit card as an ultra-short but interest-free loan. Instead of taking advantage of this benefit, however, many consumers do not pay their credit card balance in full each month, turning their credit card into a revolving credit line. Finance charges (interest) then accumulate on the unpaid credit card balance each month. If you’re in this situation, set a debt-free plan or look into transfering your balances to a low-rate credit card.

To use your credit card responsibly, you must resolve to pay your balance in full each month. That means keeping track of how much you’re spending on your credit card each month, and ensuring you will have enough cash the following month to cover your purchases.

I find that using one credit card for nearly all of my monthly purchases not only makes this fairly easy, but has made it easier to manage my money, keep my checking account balanced, and track my spending.

If you have learned how to create a spending plan and have written a budget, you know how much money you typically spend each month after your fixed costs like housing and car or other debt payments.

Let’s say your monthly spending allocation is $1,000. Now assume you’ll need $100 in cash for various transactions where using a credit card isn’t feasible. You know that you have $900 to spend for the month and can easily track how much you left to spend by checking your credit card balance, which most cards allow you to do easily and for free online.

At the end of your credit card billing cycle, simply pay the balance and start again.

Why bother? With the ease of using debit cards these days, why add a credit card to the mix if you’re not planning on paying over time? There are several reasons.

Rewards –– Most credit cards offer some kind of rewards program, giving you back about 1% of every dollar spend in the form of cash, gift certificates, or travel. Many cards provide these rewards without an annual fee. So if you can avoid paying interest on your credit card purchases completely, your credit card is actually paying you!

Security –– With growing concern over the ease of credit and debt card theft and fraudulent charges, having your credit card lost or stolen is a simpler fix than if the same happens to your debit card. In both cases you won’t have to pay for fraudulent charges, the difference is if a thief snags your credit card no money actually leaves your bank account.

Building Credit – Every month you pay your credit card bill on time, you’re building your credit history and improving your credit score, which will save you money in interest rates on every big purchase you make down the road, from your next ride to your first house. If you never use a credit card you could find yourself in your thirties and unable to buy a home!

Simplicity –– Using a credit card for your monthly purchases eliminates the need to balance your checkbook more than once a month. As long as you track your credit card spending (and don’t touch your checking account), your checking balance will always be where it should be.

Now that you have the basics of using credit cards responsibly, choose a credit card that’s right for you.

Related Posts

1. Does Your Debit Card Have a Daily Spending Limit?
2. Understanding Student Loan Grace Periods, Deferment, and Forbearance
3. Personal Loans vs. Credit Cards
4. Using Multiple Bank Accounts to Control Your Spending
5. How to Budget for and Track Cash Spending

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4 Responses to “How to Use a Credit Card Responsibly”

1. WH says:

   February 12, 2007 at 10:53 am

   Nicely sorted list! I didn’t know about the Borders VISA…

   And don’t forget that ING Direct will give $10/$25 opening bonuses for referrers/the newly referred to accounts with $250+ opening (e.g.).
2. FIRE Finance says:

   February 22, 2007 at 2:13 pm

   Feb – Week #2 – Round Up Of Carnivals And Festivals!

   Sunday is here to take us on a tour of the Carnivals published this week. It has been an exciting and eventful week…
3. Credit Card Reviews and Ratings | Credit Card Lowdown » Carnival of Credit Card #4 says:

   May 18, 2007 at 11:23 pm

   [...] David Weliver presents How to Use a Credit Card Responsibly posted at Money Under 30. Before you can use a credit card responsibly, you should understand how credit cards work. [...]
4. KS says:

   July 8, 2008 at 12:47 pm

   great information! i just got a credit card and this info is quite helpful!