How to Use a Credit Card

Credit card offer several advantages. They're convenient for making purchases, and some credit cards offer rewards on what you spend. A credit card can also be a helpful tool for building a positive credit history. If you're looking for a credit card, it's important to understand how they work and how to use them so you can find the best credit card for you.

How Credit Cards Work

A credit card allows you to make purchases and pay for them later. In that sense, it's like a short-term loan.

When you use a credit card to make a purchase, you're essentially using the credit card company's money. You then pay that money back to the credit card company, with or without interest, depending on the timing of your payment.

Your credit card company gives you a credit limit you can make purchases against. This limit will be based on factors like your credit score, income, and account history. As you charge purchases to your card, your available credit shrinks.

Then, as you make payments against your balance, you free up available credit again. Your credit card company sends you a statement every month detailing all your activity, your balance, minimum payment, and due date.

Reading Your Credit Card Statement

Each month, you'll receive a statement showing your account activity. This statement includes:

• Your total card balance
• Your available credit limit
• Purchases you made during that billing statement cycle
• Minimum payment due
• Payment due date

The minimum payment due is the smallest amount you have to pay for that month. But it's always a good idea to pay more than the minimum if you can.

Your card statement will also tell you how much it will cost you to pay off the balance over time with interest. You can avoid interest charges on credit card balances by paying your bill in full during the grace period. A credit card grace period is a set time period, typically 20 to 30 days, that you have to pay off recent purchases before interest starts accruing.

If you don't pay in full, interest begins to accrue. The amount of interest you pay is determined by your card's annual percentage rate (APR). The APR reflects the interest rate for the card, along with any fees the card charges, annualized as a percentage.

How to Use a Credit Card

Credit cards are easy to use. If you go into a store, for instance, you may be prompted to insert your card in a chip reader or swipe it at the checkout. You can also add your card to digital wallet apps for contactless payments in stores. When shopping online, using your credit card is a matter of entering your card information, including:

• Your card number
• The expiration date
• Your card's CVV security code, which is typically printed on the back

When you use your card to make a purchase, the merchant, the credit card company, and the card network (such as Visa or Mastercard) coordinate to authorize and process the payment. All of this is done electronically and practically instantaneously.

It's also important to use your credit card in ways that will help boost your credit score, while not costing you more than necessary in terms of interest and fees.

1. Pay Your Bill on Time

Credit scores are based on a variety of factors, but your payment history is the most important one. Paying your bills on time can help your credit score, while paying late or missing payments altogether can severely damage it.

2. Know How Your Card's Interest Is Calculated

Interest charges can make everything you buy with your card more expensive if you carry a balance from month to month. When you open a credit card account, be sure you understand what the APR is and how interest accrues on purchases.

Remember, you can pay off purchases interest-free during the grace period. Also, be aware that if you have balances with different interest rates, your payments may be applied differently. For example, say you have one balance at a promotional 0% APR and another at the regular purchase APR. Anything you pay over the minimum would be applied to the balance with the highest APR first.

3. Watch Out for Credit Card Fees

Credit cards can charge numerous fees, which also add to the cost of using them. Some of the most common fees you may encounter are:

• Annual fees
• Foreign transaction fees
• Balance transfer fees
• Cash advance fees
• Late payment fees
• Returned payment fees

All of these fees, as well as the card's APRs, should be listed in your card agreement. You can also find them online before you apply. If you're considering a card with an annual fee, weigh that against any value the card might offer via a rewards program or other benefits. Many cards are available without annual fees.

Similarly, if you plan to spend time abroad, you might want to opt for a card that doesn't charge foreign transaction fees.

4. Keep an Eye on Your Balance

After your payment history, the second most important factor that affects your credit score is your credit utilization ratio. It measures how much of your available credit you're using at any given time.

Generally, it's better to keep your card balance low relative to your credit limit. Maxing out your credit cards can cause your credit score to drop and also send a signal to lenders that you may be a higher-risk borrower.

Frequently Asked Questions (FAQs)

The Bottom Line

Credit cards can help you build credit, but they can also work against you if you use them incorrectly. When comparing cards, be sure you understand what you'll pay in interest and fees, as well as what you stand to gain from any rewards and other card benefits. Once you begin using a credit card, check your free credit reports periodically to make sure your account activity is being reported correctly. That can also be a good way to spot potential fraud or identity theft if your card is ever lost or stolen.