Using Credit Cards Responsibly

Being a responsible credit user means educating yourself in the basics of what credit is, how it works, and how credit cards can affect your credit. Credit cards are serious financial tools that need to be treated as such; misusing a card can leave you with a surprising amount of debt and saddle you with payments for years. So, let’s get right to the keys to using credit cards responsibly.

Understand How Credit Works before Applying for Credit Cards

Your credit is your reputation as a borrower of money. It’s based on your previous experiences with using lines of credit, as well as borrowing money and paying it back. Lenders and providers of credit send reports of your financial behavior to the credit bureaus, which report the information in your credit reports.

Your credit scores, like your FICO score, are based on this information. Responsible use of credit increases your credit scores, while irresponsible use decreases it. Know that irresponsible uses of a credit line will have a negative impact on your credit, including:

  • making late or returned payments
  • going over your credit limit
  • keeping your cards maxed out
  • failing to pay your debts
  • applying for many cards you don’t need

Learn more about credit and how to build it in our Definitive Guide: How to Build Credit from Scratch »

Learn more about the individual elements that are used to create your credit scores here: What’s in My Credit Score? »

Learn when you’ll need to pay your credit card bills here: How Long Can I Wait to Pay My Credit Card Bill? »

Check Your Credit Reports and Credit Scores

Part of understanding credit means getting and reading through your credit reports and credit scores. You have 3 different credit reports, one from each of the 3 major credit bureaus: Equifax, Experian, and TransUnion.

You can get a free copy of all 3 of your credit reports annually from Since you have 3 credit reports, you can keep an eye on your credit throughout the whole year by requesting 1 report every 4 months.

Checking your credit reports is a great way to find and stop fraud and identity theft. You can look over every account that is being held in your name, and identify any that are fraudulent. You can then take steps to remove those accounts.

Learn all about the individual sections you’ll find when you check your credit report here: Inside Your Credit Report »

Read more about how to monitor your credit report yourself or how to hire a service here: Monitoring Your Credit Report »

Fully Understand Your Card Terms and Conditions

There are many terms and features of credit cards to become acquainted with. Some of these, like interest rates and fees, are more important than others, but it’s important to know everything about the credit cards you use so you always know what to expect or what action to take.

This is vital when it comes to protecting yourself from fraud, but it also means that you can take full advantage of everything your credit card has to offer, including benefits, insurance, and potential rebates that can save you a lot of money.

Most credit cards have $0 liability for fraud and unauthorized activity, and provide protections for the items you buy. If you don’t know about these features you can wind up feeling like a helpless victim, instead of being able to take the action you need to take.

Read the Fine Print

Credit card offers may be tempting but before you decide to apply, there’s another bit of information that may not have caught your attention — namely the several pages of small print, or what we all refer to as the “fine print.” Print so small some of us need a magnifying glass to read it.

The fine print is where all of the terms and conditions for the credit card offer are buried. And when you apply for a credit card, you’re agreeing to the credit card issuer’s terms and conditions so it only makes sense that you know what you’re agreeing to beforehand. One thing you always need to remember about credit card offers, the big print giveth and small print taketh away.

Issuers Can Change Terms and Conditions

By not reading the terms and conditions you might not realize that the credit card issuer reserves the right to change the terms at their discretion, at any time. Doubt it? Read the fine print on any credit card offer or any one of your own credit card statements and you’ll find your proof.

As long as they provide notice (which would be included in the fine print on your statements), credit card issuers can change any of the terms of the initial agreement — including your interest rate. Terms and conditions will vary depending on the credit card and the issuer, which makes it even more important to understand the terms on every card — not just one.

The fine print will outline the terms for that enticing 0% interest teaser offer that first grabbed your attention, including the full terms of the introductory period and the ongoing interest rate after the introductory period expires.

This is also where you’ll find hidden fees and interest caveats, like balance transfer fees and the different rates you can expect on things like cash advances or international charges. You’ll also find details on rewards, including black out dates and exclusions.

Another one that gets people is the pre-approval incentive. Just because the offer says you’re “pre-approved” for the low interest rate doesn’t mean you’ll get it. Even though an offer may advertise that you’re “pre-approved,” if you read the terms you’ll find that your interest rate will depend on your credit, so you may not get the low interest rate that initially caught your eye. Ignoring the fine print means you’re ignoring all of these important details…READ THE FINE PRINT.

How Much Will a Credit Card Cost?

There are a few costs and fees that credit cards might come with:

  • Annual Fee
  • Purchase APR
  • Balance Transfer APR / Fee
  • Cash Advance APR / Fee
  • Penalty APR
  • Late Payment Fee
  • Returned Payment Fee
  • Over-the-Limit Fee

Annual Fee

You’ll find an annual fee on many higher-end cards, which come with better rewards, discounts, and travel benefits like airport lounge access or complimentary amenities. There are also many very rewarding and useful credit cards that don’t have annual fees.

Purchase APR

This is the interest rate you’ll pay for purchases you make with the card. Check your card terms for your purchase APR, which is also called the Regular APR. Your purchases will appear on your monthly statement.

The interest for those purchases will usually start to accrue after the due date on that statement, and you’ll find those interest charges on the following month’s statement (the time period between the statement closing date and the due date is known as the grace period). You can avoid paying any interest if you always pay off your account balance in full by the due date.

Balance Transfer APR / Fee

This is the interest rate and fee you’ll pay for balance transfers to a new credit card account. Read the card terms carefully, because there is usually a limit to how long you have to make the transfer. You’ll also usually pay a fee for balance transfers, somewhere around 3% to 5% of the balance.

Cash Advance APR / Fee

The interest rate you’ll pay if you want to take out a cash advance using a credit card, usually much higher than the regular purchase APR. Check your card terms for your cash advance credit limit, which is different than your regular purchase credit limit.

Cash advances are generally not recommended because you’ll start accruing interest instantly, instead of waiting until after the due date like purchases. There is also usually a fee for cash advances, of around 5% of the advance.

Penalty APR

Many credit cards also have this punitive interest rate for purchases, which the card issuer could apply to your account if you make a late payment, returned payment, or go over the credit limit. The penalty interest rate is usually 29.99%; check your card terms to see if this could potentially apply to you.

Insider Tip: Watch out, because a Penalty APR can even replace a 0% introductory rate, cutting it far shorter than it would have been.

You may be able to remove the penalty APR and go back to your original interest rates after you show some months of responsible activity. Check with your card issuer for details on how you can do this.

Late Payment Fee

Many cards will charge a fee for late payments. The exact amount may vary depending on your account balance, but it usually doesn’t exceed $35.

Returned Payment Fee

Just like the late fee above, many cards will charge a fee for payments that are returned from the bank. This fee is usually $35.

Over-the-Limit Fee

Some cards will charge a fee for going over your credit limit, though many today do not.

Q&A Video: What Is the Schumer Box in Credit Card Terms?

Learn more about the many benefits offered by different types of credit cards: A Guide to Credit Card Benefits »

Beware Cash Advances

The cash advance is a feature found on most credit cards. It allows you to take out cash at ATMs with a PIN that is issued along with your card, and it has an interest rate that is separate from the regular purchase interest rate.

The APR for a cash advances is usually much higher than the purchase APR, often around 25%. You’ll also incur a withdrawal fee, typically something like “$10 or 5% of the advance, whichever is greater.”

The most important thing to know about cash advances is that interest will begin to accrue immediately. This is much different than the regular purchase interest rate, which only begins to accrue interest after your billing date, which is usually 21 days after your statement period ends.

Furthermore, taking out cash advances can indicate that you are a greater credit risk because you need cash at such a high interest rate. Many cash advances can have a negative impact on your credit score.

Let’s say you have a cash advance APR of 25%, with a fee of $10 or 5% of the advance, whichever is greater, and you want to take out a $500 cash advance.

You’ll be charged a fee of $20 and will start incurring interest on that withdrawal at the 25% APR.

If you pay that advance back in 30 days, you’ll have incurred $10.42 in interest. Add that to the initial fee of $20 for a total of $32.42 in charges, for this loan of $500 for 30 days.

Initial fee: $500 X .05 = $20

Interest charged per year: $500 X .25 = $125

Interest charged per day: $125 ÷ 365 = .3472¢

Interest charged over 30 days: .3472 X 30 = $10.42

For all these reasons, we do not recommend taking out cash advances with your credit card.

It will:

  1. Immediately begin to accrue interest at a high rate
  2. Potentially decrease your credit score by making you look like a riskier borrower

Q&A Video: What Is the Cash Advance Credit Line?

How Much Should I Spend with My Credit Cards?

This is one of the most important questions you can ask yourself about credit cards. The key factor here is your credit utilization, also known as your debt-to-limit ratio. This is simply the amount of debt you are carrying on all of your credit cards, compared to the total of all of your credit limits combined.

Most experts recommend staying below 30% or 35% credit utilization to maintain the best credit score possible, and the people with the best credit tend to have a utilization around 7%.

Your credit utilization is calculated at your statement closing date each month, so whatever balance is reported on your statement is what the credit reporting agencies see. We recommend aiming for 0% credit utilization whenever possible, which means paying off your balances before the due date.

So for example, if you have 2 credit cards that each have a $500 credit limit, your total credit limit is $1,000.

If you have a balance of $150 on each card at your statement closing dates, your total utilization will be $300.

This means that your total utilization is 30%, which is fairly high and getting into the danger zone where it could start to have a negative impact on your credit.

300 ÷ 1000 = 0.30, or 30%

Learn more about credit utilization and how it is calculated here: How Does the Credit Card Utilization Percentage Affect My Credit Score? »

How Many Credit Cards Should I Have?

There is no correct number of credit cards. The right number for you will depend on your personal spending habits and finances, and what you need the cards to do for you. Despite what you may believe, having several or even many credit cards is not necessarily a bad thing.

As long as there is no annual fee, a credit card doesn’t need to cost you anything at all to own, and there are several benefits that come from having multiple different kinds of cards of varying types. For example, having more credit cards will help you keep your credit utilization low. The more cards you have the higher your total credit limit is, which pushes your utilization percentage lower.

Q&A Video: Is It Good or Bad to Have More than 3 Credit Cards?

How Long Can I Wait to Pay My Credit Card Bill?

Anytime a consumer fails to make his credit card payment by the due date, his credit card issuer will consider the account to be “past due.” For example, if a consumer has a credit card payment due on the 10th of the month and he does not make the payment, then his credit card issuer will consider him to be past due on the 11th.

Once the consumer’s account is even one day past due, the credit card issuer can:

  • Assess a late fee
  • Raise the consumer’s interest rate
  • Lower the card holder’s credit limit
  • Close the account

NOTE: All of the aforementioned actions are voluntary and at the discretion of the card issuer.

They can do all of those things at any time even if you pay on time, but being late acts as a catalyst. As far as credit reporting is concerned, late payments on a credit card are handled quite differently than late fees.

While a credit card issuer may consider an account holder to be past due immediately after the due date, the card issuer cannot report that account as late to the credit bureaus just yet. There are rules and standards that must be followed. All 3 credit bureaus have the same policy: an account cannot be accepted as being late until the payment is a full 30 days past the due date.

Until a consumer reaches the point of being a full 30 days past due on his credit card payment, the account must be reported to the credit bureaus as “current and in good standing.” This standard is clearly defined in the credit industry’s standard guide, called the Credit Reporting Resource Guide.

When Should I Close a Credit Card?

Check Your Card Statements Monthly

Your credit card statements provide a monthly summary of all the transactions that took place during the previous statement period. Checking this summary every month will let you see if any unauthorized transactions took place, like payments that you don’t recognize or double-billed items. You can check your statement online or it will be mailed to you, or both.

If you do find some unauthorized activity on your statement, contact your credit card issuer immediately. The major credit card issuers all have $0 fraud liability policies, so as long as you get in touch with your issuer when you notice the problem you have no need to worry.

Learn more about what to do when you find an incorrect or fraudulent charge on your statement here: How To Dispute A Fraudulent Credit Card Charge »

Consider an Autopay System

Most if not all credit card issuers offer an autopay feature that will automatically pay a certain amount of money towards your credit card balance each month. This can be set to pay just the minimum required amount, the full balance, or some other amount, depending on what your issuer offers.

The automatic payment will usually occur in response to your statement being generated. Consider using automatic payments to ensure that your credit card bills are always paid on time, or to take the hassle out of manually paying them each month. If you have several cards it may make sense to use auto-pay on some of them.

If you have one card with a 0% introductory APR and other cards with regular interest rates, for example, you could set the cards with interest rates to always be paid in full each month to avoid that interest, while paying whatever you’d like on the 0% card manually.

Remember That Credit Cards Are a Privilege to Use, Not a Right

You don’t have the right to a credit card; instead, it’s a privilege you’re allowed to use based on the worthiness of your credit history. Abusing your privilege to a credit card could result in it being revoked. Respect credit cards as the powerful financial tools that they are and they will treat you well.

The Insider

Brendan Harkness
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