The Golden Rules of Plastic: Credit Card Best Practices

We rave about how awesome credit cards are. But we also heavily warn against them in some circumstances. It’s no secret that credit cards can (and have) wrecked the financial lives of millions.

So, when do they help you and when do they hurt you? The key difference lies in responsible usage. Those who follow credit card best practices reap rewards, and those who don’t, pay dearly.

That’s what we’re covering in today’s post. We’ll run through best practices for using credit cards, what responsible usage looks like, and how to avoid the expensive traps set by big banks and financial institutions.

Credit Card Best Practices 

Some of these are obvious, others not so much! Here are the best practices for credit cards and tips to make sure they don’t wreck your financial life…

1. Only buy stuff you can afford

Rule number one of being a responsible credit card user: don’t spend money you haven’t earned yet.

Of course some big ticket items in life (going to college, buying a house, and sometimes buying a car) require taking out loans and going into debt.

But consumer items like clothes, toys, and restaurant meals, or even necessary staples like rent, utilities and cell service should only be paid with credit cards if you have the money to cover the bill.

Spending money you don’t have will always catch up with you. So when you’re out shopping and buying things, treat your credit card like a debit card and only buy things you can cover with cash in your checking account.

2. Pay on time, in full, every single month

Many people see “minimum payment” on their bill and think that’s the only amount that needs to be paid in order to avoid penalties. But the reality is, interest kicks in immediately for any unpaid balance. If you’re just paying the minimum, you’re losing. 

Not only that, interest is calculated, compounded and applied every. single. day. until you pay the balance. This means you don’t just pay interest on your balance, you pay interest on your interest! Every day!

Paying your bill in full, on time, every month ensures that you will never pay interest on your purchases. A great way to make sure you never miss a payment is to set up automatic payments from your checking account.

3. Never take cash advances

Many credit cards allow you to pull money from an ATM if you need cash in a pinch. Some even let you write checks that withdraw money from your line of credit.

But you should never fall into this trap. Cash advances have a special set of fees and interest, and they apply the second you make a transaction.

When you withdraw money from an ATM using a credit card, you’ll pay a few dollars for the ATM fee, an immediate cash advance fee (typically 5% of your transaction amount), and any money withdrawn will count towards your outstanding balance, accruing interest every day moving forward. Triple ouch!!

If you need cash, use your debit card!! Never use cash advances on credit cards. That’s a losing proposition.

4. Monitor your statements each month

Even though you (hopefully) have set your bills to auto-pay, this doesn’t mean you can turn a blind eye to monthly bills. One of the credit card best practices is to review all your charges and transactions each month.

The good news is, that’s really easy to do these days! Most credit card companies have mobile apps that show a history of transactions, group them by category, and also sometimes provide links to dispute specific purchases.

Reviewing your spending isn’t just an attempt to catch potential fraud. It’s also to catch yourself from overspending. Budgeting apps like Credit Karma, Empower, and YNAB are awesome for this reason. They help make you aware of bad spending trends so you can correct them in order to stay within your budget. Here are 5 other apps you might want to check out (some have a small annual fee!)

5. Keep your utilization low

No, we don’t mean using your credit cards less… We mean keeping your spending low relative to your total available credit limit.

For example, let’s say you have a credit card with an available credit limit of $5,000. This is the absolute maximum you can spend on that card…

Now let’s say your typical spending each month is about $4,000… This puts your credit utilization at about 80% ($4,000 usage divided by $5,000 limit). That’s a very high utilization ratio!

Even if you are paying off the full balance each month and have excellent financial habits, credit bureaus may flag you as a risky borrower. Because on paper, they see you “almost maxing out” your available limit each month.

Best practices say that you should try to keep your credit utilization under 30% if possible. You can achieve this in a number of ways. The easiest methods are to a) pay your bills more frequently, b) ask your issuer for a limit increase, or c) split your usage across different cards to keep utilization low.

6. Watch out for annual fees

Credit card companies have a sneaky way of disguising their annual fees. Sometimes they are “waived” for the first year when you sign up. Other times they are “offset” by a bunch of perks or potential discounts for using the card. In any case, many people forget about these fees and end up paying them each and every year like clockwork, getting little value in return.

We’re not saying all annual fees are bad. Some cards come with perks that outweigh that fee. But it’s a good idea to review all your credit cards each year to make sure the cards you’re paying for are being utilized properly.

Pro tip: Before closing any credit cards with annual fees, try calling the card issuer and seeing if you can transfer your account to a $0 annual fee credit card. This will keep the line of credit open, and hopefully give you access to some of those same rewards.

7. Use your points/miles/rewards!

Studies show that about half of Americans never use their airline or hotel reward points. They build them up, only to let them expire years later.

Don’t be one of those people. Use your available rewards (or donate them if you can — many airlines & hotels let you gift miles or points to charity. Better yet, sometimes it’s a tax deductible donation!)

We love simple cash back credit cards for this reason. Rewards are usually applied straight to your account in the form of a statement credit. Capital One points, American Express points, and Chase Ultimate Rewards points also have redemption options for statement credits.

The longer you let your points and rewards sit unused, the more chance you have of forgetting about them. Not to mention, they lose value over time due to inflation!

The Bottom Line:

Credit card companies make a TON of money by charging people interest, annual fees, and transaction surcharges. But you can avoid paying all of these fees by simply following our credit card best practices and establishing good financial habits.

Become a responsible user. It’s the only way credit cards will work for you, not against you.

Related:

• Common Credit Score Myths
• Our “super chill” credit card strategy

*Feature pic by rupixen.com on Unsplash

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