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One of the biggest debates in personal finance is “should you use a credit card?”
Some financial experts – like Dave Ramsey – are adamant that no one should use credit cards ever under any circumstances. They say that credit cards will inevitably lead to overspending, debt, and financial destruction.
But…is that really true? Should we avoid Chase and American Express like a toxic ex?
The truth is, credit cards can be an extremely useful tool. They are a way to build a credit score to make things like renting an apartment or buying a house easier and they often come with good protection against fraud and reward points that can help you save money.
The catch is that you have to learn how to use credit cards wisely.
Credit cards are kind of like alcohol. Yes, there are people who struggle to use it responsibly and can enjoy better, healthier lives if they avoid it altogether. But there are also people who can create healthy boundaries around it. Making a blanket statement that nobody should use credit cards ever isn’t reasonable.
Today, I’m going to talk about who should and shouldn’t use credit cards and how to use credit cards wisely if you are going to use one.
Should YOU Use a Credit Card?
So how do you know what category you fall into? Are you someone who should use a credit card or should you avoid them all together?
A good test is “Do you currently have credit card debt?” Meaning, do you carry a balance on your credit card that you can’t pay off at the end of the billing cycle?
If so, it’s time to stop using your credit cards for purchases and to start focusing on paying down the balance.
Besides going further into debt every time you use a credit card, if you carry debt on your card your credit card company waves your “grace period.” This is the period of time in between when you make a purchase on your card and when you pay your credit card bill.
If you’re in the habit of paying your card off every month, then typically you swipe your card to buy gas and don’t pay anything for it until you pay your credit card bill at the end of the billing cycle, so you got to borrow that money from your credit card company for free.
But once you carry a debt balance from month to month, that grace period goes away -- and the minute you buy gas, you start paying interest on it.
The other reason to avoid using a credit card is if you have a history of debt and don’t trust yourself to be able to avoid getting into consumer debt again.
So…what is the best way to use a credit card? I’m going to give you 9 tips for how to use a credit card wisely.
How to use a credit card wisely:
- Never put more on your card than you can afford to pay off when your bill is due
- The way to use credit cards to your advantage is to never pay interest to the credit card company. That means you always want to pay off the full balance when your bill is due.
Credit cards often approve you for more than you can actually afford to spend every month. Do not let them set your spending limit, you need to set your spending limit!
Know how much you can spend every month and stay within that – no matter what your credit limit is
To live within your means, we recommend following the 50/30/20 budget.
In the 50/30/20 budget, you spend 50% of your monthly income on needs, like rent and car insurance, 30% on wants, like a fun night out, and save at least 20%.
2. Never use cash advance
Credit cards are known for having incredibly high interest rates that work against you — and of these, the rates and fees on cash advance are the worst! Do not use the cash advance feature on your card.
3. Make payments on time
Never, never, never miss a payment! Your payment history has the biggest impact on your credit score, so never miss these payments. Delinquent payments can impact your credit score for up to SEVEN YEARS!
You don’t want to accidentally miss a payment simply because you were disorganized or you mismanaged your money that month. Doing this makes life much harder for future you!
And once you miss this payment, you’ve waived the grace period that I mentioned above and are now carrying a debt balance and your credit card company is charging your interest that compounds daily.
Set up automatic payments to make sure these doesn’t happen.
4. Don’t put too much on your card
Remember you set your spending limit -- not your credit card company. Just because they have approved you for a high limit does not mean you should use it
A large factor in calculating your credit score is called your credit utilization ratio. It is the amount of credit you are using dividend by the total credit you have available to you. You want to keep this ratio under 30% on each card and across all cards
So, let’s say you have two credit cards. Card A has a limit of $4,000 and Card B has a limit of $6,000, then you shouldn’t spend more than $1,200 on Card A, $1,800 on Card B, and $3,000 overall.
When I use my card for big purchases, which I like to do because I love the points I will either split the purchase onto multiple cards or pay for it with my credit card to get the points, then go home and transfer the money from my bank to my credit card to pay off the purchase right away so it doesn’t hurt my credit utilization ratio.
5. Be strategic about applying for new credit cards
Don’t apply for the Home Depot card just because it will save you $50 on today’s purchase.
Your credit score is a thing you need to take care of and making random credit applications can have a detrimental effect.
Every time you apply for a credit card they will do a hard pull on your credit and it will temporarily lower your credit score by about 10 points
If you do this too many times in a 12-month period, it will lower your credit score by more and for longer.
I don’t want to keep track of when the last time I applied for credit on a random shopping trip, so as a rule I don’t ever do this if I am asked at the time of purchase.
6. Avoid cards that charge an annual fee unless the rewards program is truly worth it to you (now and in the future)
Related to the last tip, think hard about the cards you are applying for and avoid cards that charge an annual fee unless the rewards program is truly worth it to you (now and in the future).
You’ll want to avoid closing the card in the future because that can have a temporary negative impact on your credit, so make sure it is a card you are going to want for a long time.
I talk to a lot of women who have a card that they want to cancel to avoid the annual fee but it is also their longest running credit history and they have to choose between maintaining their credit history or saving the money by closing the card and not paying the annual fee.
7. Actually use your points!
Remember one of the benefits of using credit cards properly is the rewards points that you can earn. Make sure you actually use them!
These points lose their value over time (the inflation we are experiencing in life right now, that happens to credit card points as well) so make sure you actually cash them in and let yourself experience the rewards.
Some people like to save them up and then use them for some kind of dream vacation.
I’ve found it works better to use my points for everyday things. My favorite cards are my Amazon card that lets me turn my points into purchases on Amazon that I was going to make anyway and my Amex that lets me transfer my points into gift cards at major retailers like Home Depot.
8. Understand your interest and fees
Read the fine print on your credit card. For every card you have, you should know what interest rate - known as APR and what fees you’ll be charged if you use the card incorrectly.
Did you know it takes the average person about 10 years to pay off $5,700 of credit card debt?
When you understand how difficult credit card debt is to pay off, it really motivates you to avoid it
9. Call your credit card company and ask them about anything that you don’t understand
Remember, you are their customer and it is your right and your responsibility to understand the product and contract that you have with them.
Free resources for you!
If you really struggle to implement these tips, then maybe using a credit card isn’t the best option for you. But if you do follow this advice, then you should be able to avoid credit card debt and benefit from the fraud protection and reward points of using credit cards no problem.
If you already have credit card debt, check out our free masterclass, Say Goodbye to Credit Card Debt Forever.
And if you want some tips on improving your credit score, download our free credit-boosting checklist!
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