The Dos and Don'ts of Credit Cards: How to Use Them Wisely

3/4/2024 - By Sarah Horne

Credit cards can be a powerful tool in your financial toolkit. Using them properly can help build credit and provide exciting rewards. As is the case with most powerful tools, improperly using it can cause significant harm. This article will discuss some do's and don'ts of credit card use.

Do: Use your card with caution.

Treat your credit card like it's a debit card. If the money to cover a purchase isn't in your bank, don't spend it. Following this rule should allow you to pay off your credit card each month, leading to a higher credit score. But you have to remember to make your monthly payment. Setting up auto-pay for your monthly bill is a great way to make sure the bill is paid on time. You can dispute charges you’ve already repaid.

Don't: Turn a blind eye to your spending.

Did you know it's more psychologically painful to pay with cash than with a credit card (1)? Using a credit card for purchases can make overspending easier. Routinely review your credit card statements. Keep a eye on your month-to-month spending, and compare your most recent bill to the same month’s bill from the previous year. Spending more over time is expected with normal inflation, but make sure your rate of increase is below the household’s income growth. Use a budget or regularly check in on your spending to make sure you’re not stretching yourself too thin.

Do: Use your credit card for reliable expenses.

Using your credit card to pay for regular, predictable expenses can prevent overcharging and build credit. Housing payments, cell phone bills, and subscription payments may be good candidates for your credit card, because these payments are predictable.

Don’t: Overcharge your credit card.

Your credit limit and utilization ratios impact your creditworthiness to lenders. A credit limit is the total amount that can be borrowed at any time. Reaching the limit, or maxing out your card, can indicate you're not living within your means. It will also negatively impact your credit score. Credit utilization ratios are represented by dividing your outstanding balance by your credit limit. Some professionals recommend aiming for a credit utilization ratio lower than 30%. This means your running balances are less than 30% of your available credit.

Do: Increase your credit limit each year.

Every year things get more expensive, so it is natural for your spending to increase. However, most credit card companies do not adjust your credit limit to account for this. In order to keep utilization rates low, call your credit card company each year and ask for an increase in your limit.

Don't: Use your credit card for unexpected expenses.

Your credit card should not replace your emergency fund. If you can't pay off a charge to your credit card quickly, avoid taking it on in the first place. Credit cards carry some of the highest interest rates in the industry. If you must finance an expense, explore options with lower interest rates. Better yet: build your emergency fund to avoid taking on debt altogether.

Do: Take advantage of rewards.

Credit cards offer a variety of benefits that you can leverage to your advantage. Analyze your past purchases and shop around for cards that offer rewards you'll use. Cash back, travel rewards, and discounts on purchases are just some of the attractive offers. Be sure to understand your card's terms and any limitations on how you can accrue and use your rewards. You can find websites dedicated to helping consumers find the best fit card for their needs.

The Bottom Line

Misusing your credit card can hurt your credit score and put you into a high-interest rate debt that’s hard to escape. On the other hand, using your credit card wisely can reduce interest rates on future purchases and offer attractive rewards. The bottom line is that credit cards should be used with respect and discipline as a powerful tool in your financial toolkit.

Questions?

If you or someone you know has questions about credit cards or could benefit from a speaking with a trusted financial advisor, please contact us.

Footnotes

1. Source: Zellermayer, O. (1996). The pain of paying. (Doctoral dissertation). Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, PA.

About the Author | Sarah Horne

Sarah is an associate advisor for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund, where she serves clients through portfolio management and financial planning. With a master’s degree in education, Sarah appreciates the firm’s educational approach that supports informed decision-making. Sarah leads the firm’s women-focused educational series, Building Confidence, and is currently completing coursework for the CERTIFIED FINANCIAL PLANNER™ certification. Prior to joining Saltmarsh, she held a career in higher education and later transitioned to the financial services industry, focusing on risk management and retirement planning.