Using Credit Cards Responsibly

Credit cards are serious financial tools. There is no reason a bank is obligated to approve you for a credit card. They can also choose to end the relationship at any time. Using credit cards is a privilege, not a right.

Misusing a card can leave you with a surprising amount of expensive debt, and can cause long-lasting damage to your financial health.

If you use them responsibly, though, credit cards can help you build great credit and save you money. You may also get some other benefits, especially compared to debit cards or cash.

To understand how to use credit cards responsibly, you’ll first need to understand how credit history works.

This page is a quick overview of responsible credit use. Along the way, there are links to more in-depth information. The next page, our guide about how to build great credit with credit cards, will cover the specifics in more detail.

Step One: Understand How Credit History Works

Your credit history, sometimes simply called “your credit” or “your creditworthiness,” is your reputation as a borrower of money. Based on your credit history, a company may decide whether it wants to do business with you, and on what terms.

Your credit history can affect your ability to:

• get approved for a credit card
• get approved for a mortgage or auto loan
• rent an apartment
• connect utilities at an apartment or house
• get insurance coverage
• get a cell phone plan
• find employment

You’ll have an advantage in these areas if you build good credit history. The length of your credit history is one indicator of how trustworthy you are as a borrower. The sooner you start building credit, the better.

Lenders send information about your financial behavior to credit bureaus. The credit bureaus store this information and use it to create your credit reports. See what kind of information is and isn’t in your credit reports here.

A credit score is a number that indicates how risky you are as a borrower. It can be used to determine the likelihood that you will pay your bills, for example. Credit scores are determined by mathematical models based on information on credit reports. You have dozens of different credit scores, not just one. You can learn more about the factors that affect credit scores here.

Step Two: Understand How Credit Cards Work

Once you understand how credit works, it’s time to decide if a credit card is right for you.

A credit card is like an instant loan: when you make a purchase with a card, the credit card company will pay for the purchase on your behalf. They expect that you’ll pay them back for the loan in the future.

The maximum your credit card issuer will let you borrow at one time is determined by the credit limit on your account.

If you don’t pay the credit card company back soon enough, they’ll start charging you interest on the amount you owe them. Interest is a fee you pay for borrowing money.

As long as you have the discipline to only spend on credit cards what you can afford to pay off completely, on time, when the bill is due, a credit card will probably be beneficial to you. Credit cards can be 100% free to use.

If you don’t trust yourself to only spend what you can pay in full, then you may be better off avoiding credit cards. It’s easy to get deep into credit card debt if you don’t follow this simple rule. Credit cards can get expensive quickly.

How to Use Cards Responsibly

By focusing on a few fundamentals, you can keep your credit reports in good shape. Since credit scores are based on credit reports, this means you’ll also have good credit scores.

1. Only spend what you can afford: Don’t spend more on a credit card than you can afford to pay in full when the bill is due, except in certain situations where you can avoid interest.
2. Always pay all your bills on time: Late payments or accounts that go to collections are a terrible signal to lenders.
3. Keep debt low relative to your credit limits: Maxing out credit cards is bad sign. Paying down loans or paying them off is generally seen as a good thing.
4. Don’t apply for lots of new credit in a short amount of time: For example, lenders may think you’re a greater risk if you apply for 6 new credit cards in a year. There are some exceptions, like when you’re shopping around for car loans from multiple banks.

Paying a credit card might be confusing at first, but understanding how to responsibly pay your credit card bill is key to using credit cards to your advantage.

If you’re interested in using credit cards to build and consistently improve your credit history, continue to our comprehensive guide to building credit with credit cards.