What Is the Best Way to Use a Credit Card?
Credit cards aren't all bad. In fact, with responsible use, they can be a useful tool in your financial toolbox.
Contributing Writer at Tally
March 15, 2022
Credit cards get a bad reputation because of the financial troubles they can get users in, especially those getting their first credit card. However, with proper use and responsible debt management, credit cards can be helpful and, in some cases, even profitable.
So, how can you use a credit card in a beneficial way while minimizing the risk of overspending? Below, we cover the best way to use a credit card to put you on the path toward responsible and beneficial credit card use.
So, what's the best way to use a credit card?
There's a wide range of best practices for credit cards. Below, we'll outline some of the most important ones, why they're important and how they impact your finances and credit score.
Use your credit card for daily expenses
There's nothing wrong with responsible credit card use. In fact, without daily use, the credit card issuer may close your account. The key is to use it for your daily living expenses — things you've already budgeted for — and keep your spending habits in check.
As you use your credit card to pay your expenses, save the cash you would normally use to pay for these expenses in your bank account. Once the credit card bill comes due, use all the cash you saved to pay the card's full statement balance.
Pay it off before the due date
You want to pay off your credit card by the due date to avoid late fees and interest charges. Paying the statement balance by the due date will ensure that you pay on time and that you have a $0 statement balance before the interest grace period ends.
The interest grace period is the period of time between the statement closing date and the due date. The credit card issuer doesn’t apply accumulated interest to your account during this period.
If you have a $0 statement balance, there will be no interest charges when this period expires. Plus, if you're using a rewards credit card, you'll still get all the rewards points and cash back you earned, despite paying no interest.
Keep your credit utilization rate low
Credit utilization ratio — the percentage of your total available credit limit you're using — accounts for up to 30% of your FICO credit score. The lower your utilization ratio, the more positively it impacts your credit score.
It’s recommended to at least have a ratio of 1% — but not to exceed 30%. Keeping your credit utilization under 10% is generally considered optimal.
So, what can you do to keep your credit utilization low? There are various ways to reduce your credit card usage. But two options include:
Limiting the amount you spend on your credit card or
Using a two-payment strategy that involves making one payment before your statement closing date and another before your due date
Here’s how each of these options work.
For the first option, let’s say you want to aim for a credit utilization of 20%. You would need to make sure you don’t use more than 20% of your available credit. So if you have a credit card limit of $5,000, you wouldn’t want to charge more than $1,000 per billing cycle on your card.
With the second option, you won’t have to be as careful with how much of your credit limit you use. Instead, you can pay off your credit card using a two-payment strategy.
The key to this strategy is when your credit card reports your balance to the three major credit bureaus. Your reported balance is what’s used to determine your credit utilization ratio. While the exact reporting date of each credit card can vary, it will happen after the closing date of your billing cycle. The reported balance will likely be the same as your statement balance.
So, here’s how you can use this to your advantage. Let’s say you have a $5,000 credit limit on your credit card, but you’ve used $4,000 of it. If the $4,000 balance were reported to the credit bureaus, your credit utilization ratio would be 80%.
To avoid this, pay a portion of your balance before the end of your billing cycle. Then, after your billing cycle ends, you can pay the remaining balance by your statement due date to avoid a late payment or interest charges.
So, based on the above example, you could make a $3,000 payment on your credit card before the end of the billing cycle. This would leave you with a $1,000 balance, and that remaining $1,000 would be reported to the bureaus at the end of your billing cycle, and then you could pay it off by your due date.
Don't carry a balance from month to month
Somehow, a rumor got started that you must leave a small balance on your credit card from one month to the next so that your credit card company can report your on-time payments to the three major credit bureaus and help you build credit.
However, this is untrue. Creditors will report your on-time payments to the credit bureaus whether you carry a balance month to month or not.
Carrying a balance from one month to the next will result in interest on any credit card debt you carry between months.
Make at least the minimum payment
You may run into times when you can't pay off the statement balance. In these cases, don't simply give up. Instead, pay at least the minimum monthly credit card payment on or before the due date.
By doing so, you'll avoid pricey late fees and build up a good payment history, which accounts for 35% of your FICO Score and is key for a good credit score. Plus, late payments or missing payments will remain on your credit history for up to seven years.
Find the right rewards card for you
One of the biggest perks of using credit cards is the rewards. Whether it's cash back, points toward travel or points toward purchases, it’s essentially “free money.” However, you’ll want to find a credit card account with a rewards program that fits your lifestyle.
For example, if you drive an electric car, the last thing you need is a credit card that gives 5% cash back at gas stations. Likewise, you don't need a card with great travel rewards if you rarely travel.
Review the points tiers carefully and find one that best suits how you'll use it.
Some cash back cards have revolving reward points tiers. For example, one month may offer 5% on fuel and the next month 5% at grocery stores. Keeping an eye on these tiers and adjusting your use is critical to maximizing your rewards.
Save with balance transfers
If you have high-interest-rate credit card debt, it can seem like an endless cycle as you try to pay it off. You make a payment, but the interest rate is so high a huge portion of the monthly payment goes straight to interest.
Some credit card companies offer balance transfer promotions to help drum up business. These promotions are often 12 to 18 months with little interest or are even interest-free, such as a 0% annual percentage rate (APR) for 18 months.
You can transfer your high-interest credit card balances to this card and enjoy no interest for the promotional period. With a 0% APR offer, you can also divide your balance by the promotional term to determine exactly what monthly payment to make to pay off the credit card before interest charges kick in.
For example, if you transfer a $3,000 balance to a credit card that’s offering 0% APR for 12 months, you can divide $3,000 by 12 to get a monthly payment of $250. If you pay $250 each month for those 12 months, you’ll have paid off your credit card.
Remember that most balance transfer credit cards also have a 3% to 5% balance transfer fee. Factor that fee in before deciding to use it, but this fee is usually less than the interest you'd pay during the same period.
Use a credit card to build credit and preserve personal finances
If you use your credit card responsibly for daily expenses and pay your statement balance in full before the due date, you can avoid interest, build credit and protect your personal finances. This is often the best way to use a credit card.
However, this may not always be possible. When money's too tight to pay off the balance, at least make the minimum monthly payment by the due date. This helps you avoid late fees and potential late payment marks on your credit report.
If you're struggling to manage your credit card debt, the Tally† credit card debt repayment app can help. Our app helps you manage your credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.