How to use a credit card: Best practices for smarter spending

Key Takeaways:

• ​A credit card lets you borrow money up to a set limit while helping you build a positive credit history.
• ​To use it effectively, pay your balance on time, keep your spending below your credit limit, and monitor statements for errors or fraud.
• ​Learning how to use a credit card responsibly can help you build credit, earn rewards, and avoid costly interest charges. ​

Credit cards can feel overwhelming if you’re worried about debt or high interest.

Learning how to use a credit card responsibly can save you money, help you build your credit, and give you access to valuable rewards. It gives you access to a set credit limit and allows you to make purchases without carrying cash. However, it comes with responsibilities, including paying your balance and understanding your card’s terms.

You can also enjoy credit card perks, like cash back, airline miles, travel points, and more. Our guide provides tips and tricks for using a credit card, avoiding fees, and building a healthy credit score over time.

How credit cards work

A credit card lets you buy things now and pay for them later. When you use it, the card company pays the store for you. You then pay the credit card company back at once or in monthly installments.

Each card comes with a credit limit, which is the maximum amount you can borrow. As you use the card, your available balance goes down. When you make payments, your available balance goes back up.

Here’s the typical process:

• You pay a merchant with your credit card.
• The credit card company pays the merchant.
• Each month, you get a statement showing a list of your transactions, account balance, due date, and minimum payment.
• You repay some or all of what you borrowed.
• If you carry a balance, the card company may charge you interest.

Credit cards can help you spread out expenses, but carrying a balance usually costs more in the long run.

Credit card interest

Credit card interest is what people pay to borrow funds from their credit card company. To understand how much interest you pay, the interest is typically shown as an annual percentage rate (APR) on your statement. Credit card interest starts to accrue on your account balance if you don't pay it off in full each month.

Most cards have different APRs for different situations:

• Purchase APR: Interest charged on regular purchases.
• Balance transfer APR: Interest on balances moved from another card.
• Cash advance APR: Interest on cash withdrawals and certain cash-like purchases.
• Penalty APR: A higher rate that may apply if you miss payments.
• Promotional APR: A temporary, lower rate that may apply to new purchases or transfers.

Credit cards can also offer a grace period, usually 21 to 25 days after your billing cycle ends. If you pay your full statement balance within this time, you may avoid interest accruing on your purchases. If you carry any balance forward, you may lose the grace period and begin accruing interest daily.

Credit scores

Your credit card use affects your credit score, which lenders use to assess how you manage debt. Using a credit card responsibly can help you build credit over time, while mismanaging it could lower your score.

Here are a few ways credit cards can affect your credit score:

• Payment history: On-time payments may help your score. Late or missed payments may hurt it.
• Credit utilization: This is how much of your available credit you’re using. Try to keep it under 30% to show lenders you’re managing your credit responsibly.
• Length of credit history: Older accounts help build your score, even if you aren't actively using them. Closing an account could shorten your average history and impact your credit score negatively.
• Credit mix: Having different kinds of credit, such as revolving credit and installment loans, can strengthen your credit profile.
• New credit inquiries: Applying for new cards adds a hard inquiry, which can temporarily lower your score.

Understanding how to use a credit card to increase your credit score can work in your favor. Consistently using your credit card, making payments on time, and keeping balances low are practical ways to maximize the benefits and help reduce negative impacts to your credit score.

Types of credit cards

Credit cards come in many types, each designed to meet different financial goals and needs. While all cards share basic features like a credit limit, minimum payments, and an APR, the benefits, eligibility requirements, and intended use can vary widely.

Choosing the right type of card depends on your spending habits, credit history, and financial goals. Here are the main types of credit cards and how they work:

• Secured credit card: Requires a refundable security amount that sets your credit limit. They can be useful for building or repairing credit.
• Unsecured credit card: The standard type of card. No deposit required, but approval can depend on your credit history and income.
• Student credit card: Made for students with limited credit history. Usually has a lower limit and simpler terms.
• Store credit card: Tied to a retailer, often offering discounts or rewards at that store. May carry higher interest rates.
• Rewards credit card: Provides points, miles, or cash back for purchases. Some cards offer higher rewards for specific categories such as dining, travel, or groceries. Rewards may come with an annual fee.
• Business credit card: Designed for business owners, with features like expense tracking and employee cards.
• Specialty cards: Offers unique benefits, like travel perks or extra cash back in certain categories.

Some cards can fit into multiple categories, like a student card that doubles as a rewards card. These groupings are useful when evaluating which card type best suits your needs.

Pros and cons of credit cards

Credit cards can be useful financial tools if used responsibly, offering convenience, rewards, and protections. However, they can also lead to high costs if you overspend or carry a balance. Interest charges and fees can add up quickly. Here’s a quick breakdown of the main pros and cons.

How to apply for a credit card

Applying for a credit card requires preparation and understanding of your finances. Following a clear process can help you choose the right card, improve your chances of approval, and manage your credit responsibly.

Here are the key steps you can take before and during the application process:

1. Assess finances: Review your income, expenses, and existing debt to determine how much credit you can handle. Knowing your financial situation helps you select a card that fits your budget.
2. Determine goals: Decide what you want from a card, such as building credit, earning rewards, or transferring a balance. Your goals will guide which card features are most important.
3. Compare cards: Look at interest rates, fees, rewards, and other terms to find the best fit. Use comparison tools and read the fine print carefully.
4. Gather required information: Be ready to provide personal and financial details, including your legal name, Social Security number, income, employment, and housing costs.
5. Fill out application: Apply online, by phone, or in person. Accuracy matters, as errors can delay approval. Consider checking your eligibility first with a pre-qualified vs. pre-approved credit card tool to estimate approval chances without affecting your credit score.
6. Await approval: Most online applications provide a decision quickly, but some may require additional review. If approved, review the cardmember agreement carefully.
7. Activate card: Once received, activate the card following the issuer’s instructions and set up a plan to use it responsibly.

What to do if you aren’t approved for a credit card

If your application is denied, don’t apply repeatedly, as frequent applications can harm your credit score. The issuer will send you a communication describing why your application for credit was declined. This communication, also known as an adverse action letter, will provide you important information that may be helpful to you when you apply for other credit products in the future.

Then, look over your credit reports from all three major bureaus to spot any mistakes. If you find something that's off, contact them to have it corrected.

Address any issues contributing to the denial, such as paying down high debt, improving payment habits, and limiting hard inquiries.

You can also explore alternative options, like applying for a secured credit card, becoming an authorized user on a trusted family member’s account, or using a credit-builder loan. After addressing these factors, reapply strategically for a card that better matches your credit profile.

How to use a credit card responsibly: 12 tips

Using a credit card enables you to make essential purchases now and spread out the payment, build credit, and manage expenses. But without a plan, balances can grow and interest can add up quickly. The best way to avoid that is to set good habits from the start.

Here are some practical tips for using your credit card responsibly:

1. Aim to pay off your balance every month
2. Pay on time
3. Don’t go over your credit limit
4. Use it to budget
5. Read the terms and conditions
6. Understand different transaction types
7. Review statements regularly
8. Take advantage of rewards
9. Avoid cash advances
10. Keep old accounts open
11. Protect your information
12. Be cautious online

1. Aim to pay off your balance every month

Covering your entire balance every month keeps debt under control and helps you avoid interest charges. When you only make the minimum payment, the remaining balance accrues interest, and that interest can compound over time. This makes your purchases more expensive and can trap you in a cycle of debt.

Some people think you need to carry a balance to build credit, but that’s a myth. Making on-time payments and keeping balances low are what matter most. If paying in full isn’t possible, at least pay the minimum on time to avoid late fees and credit score damage.

If possible, pay more than the minimum whenever you can. Even small extra monthly payments can help you reduce your balance faster.

2. Pay on time

Your payment history is one of the most important factors in your credit score. Missing even one payment can lead to late fees, higher interest rates, and a negative mark on your credit report that may stay for years. Credit card issuers can also report payments that are 30 days late or more to the credit bureaus, which can lower your score.

The simplest way to stay on track is to set reminders or enroll in autopay. Automated payments can cover at least your minimum amount due, so you avoid late fees. You can always add extra payments manually during the month. Just make sure your account has enough funds to cover the charge.

3. Don’t go over your credit limit

Every credit card has a spending limit, and staying within it is important for your budget and your credit health. Going over the limit can result in declined transactions, fees, or penalties from your issuer. It can also increase your credit utilization ratio, negatively affecting your credit score.

To control your spending, try to use less than 30% of your available credit. For example, if your limit is $10,000, keep your balance below $3,000. People with the strongest credit scores often stay below 10%.

Try to use your card only for purchases you know you can pay off by the due date, like gas or monthly subscriptions. If you’re close to your limit, it may be time to cut back, review your budget, or cancel unused subscriptions.

4. Use it to budget

A credit card can double as a helpful budgeting tool if you use it wisely. Treat it like a debit card and never spend more than you can pay off in full when the bill arrives. This way, you avoid interest while keeping your spending under control.

Your credit card statement breaks down purchases by category, which makes it easier to see where your funds go each month. Many issuers also provide apps that automatically categorize transactions and send alerts when you’re nearing a set limit.

Use these features to track spending, spot patterns, and decide where to cut back. Pairing your card use with simple saving strategies can help you stick to your goals.

5. Read the terms and conditions

Most people skip the fine print, but your credit card agreement outlines key details that affect how much the card costs to use. Interest rates, fees, billing cycles, and grace periods are all listed in the “Schumer box,” a standardized table in every credit card agreement.

Reading this section of your agreement helps you understand when interest applies, what happens if you miss a payment, and whether you’ll face extra charges for cash advances or foreign transactions.

Take time to review your card’s terms so you’re not caught off guard. Know the purchase APR, penalty APR, and annual or late fees. If your card offers rewards, check the program’s rules for redeeming points or cash back. Being familiar with the conditions upfront can prevent surprises and help you choose the right card for your financial goals.

6. Understand different transaction types

Different types of credit card transactions, like purchases, cash advances, and balance transfers, might have different rules, fees, and interest rates.

For example, a standard purchase usually comes with a grace period. If you pay your balance in full, you can avoid interest. However, cash advances work differently as they start accruing interest immediately and often carry higher fees. Balance transfers may come with an introductory low or 0% APR, but those rates can expire, and transfer fees usually apply.

Other transaction types include credit card refunds, recurring charges like subscriptions, and foreign currency purchases. These can all affect your account differently, so it’s important to know how your card handles them. By reviewing your cardholder agreement, you’ll know what to expect with each type of transaction and avoid surprises on your statement.

7. Review statements regularly

Your credit card statement is a tool to help you manage your funds. It shows every transaction, your total balance, the minimum payment due, and your payment deadline. Reviewing it each month can help you track spending patterns, budget smarter, and keep debt under control.

Checking your statements also helps you catch errors or fraudulent credit card charges quickly. Most card issuers let you view statements online or through their app, so you don’t need to wait for a paper copy. Regularly reviewing your statement can protect your finances and give you a clear view of how you’re using your funds.

8. Take advantage of rewards

Some credit cards give you points, miles, or cash back when you spend. To get the most value, choose a card that matches your habits. For example, travel enthusiasts can save money with a travel rewards card, while everyday shoppers may prefer a cash back credit card.

When used wisely, rewards can add value to purchases you already plan to make. Look into welcome bonuses, bonus categories, or card-linked shopping portals, but avoid overspending to earn points. Research your options and redeem rewards to maximize their value, whether for travel, statement credits, or direct cash back.

9. Avoid cash advances

A cash advance lets you withdraw funds from your credit card, but it comes with steep costs. Unlike regular purchases, interest starts accruing right away, often at a much higher rate. On top of that, most issuers charge a fee of 3% to 5% of the amount you withdraw, along with possible ATM or bank fees.

Because of these extra charges, cash advances can quickly become expensive debt. If you need cash, explore alternatives such as personal loans, credit union options, or even talking with your bank about short-term solutions. Saving cash advances as a last resort can help you avoid unnecessary fees and high interest.

10. Keep old accounts open

Closing a credit card can lower your available credit and shorten your credit history, which can hurt your score. If a card doesn’t charge an annual fee, consider leaving it open and using it for small purchases. If it does have a fee, ask about switching to a no-fee version instead of canceling.

Older accounts also contribute to the length of your credit history. Keeping them open shows a longer track record of responsible borrowing.

If the card doesn’t have an annual fee, consider using it for a small recurring charge, like a subscription, and pay it off automatically. If it does have a fee, ask your issuer about downgrading to a no-fee version instead of closing it.

11. Protect your information

Your credit card is tied directly to your financial identity, so keeping your information private is essential. Never share your PIN, card number, or account login details with anyone. Use strong, unique passwords and set up multi-factor authentication when available.

Monitor your transactions and set up account alerts to stay alert for fraud. Unfamiliar charges, sudden declines, or unexpected balance transfers can be red flags. If you spot suspicious activity, report it to your issuer immediately. Acting quickly can prevent further damage.

12. Be cautious online

When shopping online, take extra steps to make sure the retailer is legitimate. Stick with well-known sites, and if you’re buying from a new store, research reviews and look for security signals like “https” in the URL and the padlock icon in the browser bar. Also, avoid storing credit card information on a retailer’s website to protect yourself from data breaches.

Use unique passwords for your accounts, enable two-factor authentication, and avoid entering payment details on public Wi-Fi. Some card issuers also offer virtual card numbers, which let you make secure online purchases without exposing your real card details. These steps can reduce the chance of fraud and keep your financial information safe.