5 of the Smartest Ways to Use a Credit Card
Despite the cautionary tales, credit cards can be beneficial if you're financially savvy.
December 8, 2022
There is a fine line when using credit cards. They carry a stigma, primarily due to high interest rates, compounding interest and high rates of credit card debt. However, credit cards can be a useful tool for your finances.
This article will cover the five smartest ways to use a credit card so your credit cards work for, not against you.
The 5 smartest ways to use a credit card
Have you ever wondered, "What's the best way to use a credit card?" That depends on your personal finances. But here are five uses that could work for you.
Making money from purchases
Some credit card companies offer rewards with their best credit cards. A card may offer 3% cash back on purchases. You can use the cash back you earn to purchase gift cards or pay off a statement balance. Other cards also offer travel rewards.
So, how can these work for you?
Suppose you spend $1,000 monthly on a debit card. That card links directly to your bank account, allowing you only to spend cash you have in the account. This is an excellent tool for budgeting. It promotes healthy spending habits and prevents you from accumulating debt. However, you're missing out on cash back or rewards programs in the process.
In an alternative scenario, let's say you use credit cards instead of debit cards. If you put $1,000 in purchases on a credit card that offers 3% cash back on all purchases, you'll receive $30 cash back. Essentially, the credit card issuer gave you free money.
Why would lenders do this? For one, it encourages you to use their card. Financial institutions charge merchants transaction fees, making money whenever you use their card.
Second, these cards are often reserved for those with good credit. The credit card issuer has identified you as someone likely to make timely monthly payments based on your credit report and payment history. Lenders reserve the best cards to incentivize those most likely to pay their credit card bills.
Using credit cards for budgeted expenses
Credit cards are often associated with high debt. Even when your bank account is low, it’s easy to use a credit card to make big purchases, leading to interest charges and a balance you can’t pay off.
To avoid this credit card downfall, only use a credit card to pay for budgeted expenses. Start by listing out your expenses and deciding on how much you can spend each month in different categories, such as groceries, gas, clothing and entertainment. Make sure the amount you plan to spend doesn’t exceed your income.
When it’s time to pay for the expenses you’ve budgeted for, use your credit card. Since you’ve already earmarked money for those items, you’ll be sure to have the funds in your bank account when it’s time to pay your credit card bill.
Again, knowing you can afford your spending will help you avoid high-interest debt while allowing you to earn rewards. It’s a win-win.
Using a credit card as a tool, not a lifeline
It’s easy to use credit cards as a lifeline. You may be in an emergency situation with an unexpected need for extra money, such as a new engine for your car or medical bills.
These are the kinds of expenses you don’t see coming and can lead to unintended credit card debt.
While you can never fully plan for these surprises, creating an emergency or rainy day fund is a good first step. Saving a little bit at a time can help you set aside enough money to cover unexpected costs. Then, even if you need to pay for an emergency on your credit card, you'll have the cash available to pay it off.
Paying off credit card balance on time and in full each month
Another way to avoid common credit card pitfalls is to pay bills on time and in full each month.
Paying your bill in full by the statement due date clears the balance within the interest grace period. This means avoiding paying interest. In addition, with on-time payments, you avoid late fees.
Using a card to build credit
A good credit history and credit score can help you get the best terms and interest rates on future lending, including mortgages and auto loans. Using credit cards responsibly is one way to help you establish your credit, especially regarding the two most important credit scoring factors: payment history and amounts owed.
Payment history accounts for 35% of a FICO Score. At the end of each billing cycle, credit card companies will report on-time and missed payments to the credit bureaus. We’ve already mentioned how making on-time payments can help you avoid interest and late fees, but they can also help you build up a solid payment history.
The amounts owed factor accounts for 30% of a FICO Score. One of the ways to have a positive effect on this variable is to keep your credit utilization ratio in check. Credit utilization is the percentage of your revolving credit limits that you’re using. For example, if you have a credit card with a $10,000 credit limit and your balance is $1,000, your credit utilization is 10%.
What if you carry credit card debt?
If you currently carry credit card debt, it’s okay to focus on paying off the remaining balances before trying to earn perks from a rewards credit card. You may consider a balance transfer card instead, which can be a helpful tool for paying off credit card debt.
Another way to pay off outstanding credit card balances is through Tally†.
Tally is a credit card payoff app that automatically manages your credit cards. Tally offers a lower-interest line of credit. The app then pays off your higher-interest credit card balances in the most strategic way possible while also ensuring that you make your minimum payments each month, no matter when the due date is.
Let your credit card work for you
Credit cards can be a useful tool. The key is letting them work for you. Try using your credit card to earn perks like cash back and to help build credit.
To benefit from your credit card, you’ll also want to:
Only use the card for budgeted spending to avoid late payments, interest charges and debt
Paying your bill on time and in full
Having an emergency fund as your lifeline for unexpected expenses
Do you have credit card debt that you want to pay off? Check out the Tally credit card repayment app. It can help by combining your higher-interest credit card balances into a lower-interest line of credit.
†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 - $300.