How to Responsibly Use Credit Cards

Having a credit card can make anyone feel rich.

You swipe it, you pay for an item, and you can forget about it. Right? Wrong. Just because you don’t immediately see the money come out of your bank account doesn’t mean it’s not happening. Credit cards can actually be quite dangerous if you don’t know how to use them responsibly. 

First, you need to properly frame what a credit card is. One good way to think of it is as an expensive loan. If you don’t pay it off on time, or in full, there are consequences like interest rates or hits to your credit score. Just like you don’t want to take out a loan you can’t pay back, you also don’t want to overspend in a way that you can’t pay down.  That means you should be using your credit card for things you need, not just for things you want. 

Second, you have to plan how you’re going to pay off your card. You want to make purchases that you can pay back at the end of the month, that way you’re not running up a serious balance. The best way to do this is to set up auto payments on your card and be sure you’re not overspending. That way, at the end of each month, your credit card will pull money from your bank account to pay off the balance you owe in full, which will improve your credit score and leave you without the worry of remembering to pay the card off.

The third step to being a responsible credit card user is finding the plastic that’s right for you. If you’re someone who travels a lot, you want to find a card that gives you extra rewards and points you can use on flights or rental cars. If you’re someone who eats out quite a bit, you want to find a card that rewards you for frequenting restaurants. You’ll also want to look for whatever will help you improve your credit score or save you money on interest. Those kinds of credit cards are typically different than the ones that offer rewards.

Fourth, understand when it’s okay to use your credit card for an emergency. If you’re taking all of this advice in stride, you’ll realize that there are actually times when a credit card can come in handy. Say you have a serious issue with your car or need medical treatment that you can’t pay for upfront out of pocket. In those cases, using a credit card can make good sense. You can make a big payment upfront and then pay it down over time, handling the emergency and setting yourself up to responsibly pay off the debt you incurred. But credit cards are only useful for emergencies if you’ve been using them responsibly before you really need them.

Finally, do your best to have as few cards as possible. This makes accounting much easier, and that means you won’t lose track of what you’re spending in a given month. If for some reason you already have more than two credit cards, a wise move would be to cut the extras up, pay them down as soon as you can and keep all your spending on the one or two credit cards you have left over. 

Once you have a good understanding of the risk you take on by using a credit card, and a good plan for how to pay your credit down, all you’ll need to do is keep your accounting simple. If you can follow these steps, you’ll be able to responsibly use a credit card and maintain your economic freedom.

Additional Resources:

How Do Credit Cards Work?

How to Save Money on Housing

Avoid These 9 Credit Card Mistakes to Keep More of Your Money

Full Episodes Available on Crackle

View Next Article »