How to Use Credit Cards Wisely Without Getting into Debt
With us now shifting from the summer to fall season, there may be a quick trip you’re looking to take soon. My husband and I took a weekend trip to Boston just to get away for a few days (see my pic from their massive arboretum). But of course when deciding to go on a trip, you also need to discuss how you’re going to pay for it. For us, the answer is always credit cards. Credit cards can be powerful financial tools when used responsibly. They offer convenience, rewards, and the ability to build credit—but if misused, they can lead to a cycle of debt that's hard to escape.
Credit Card Management Mistakes
I wasn’t always wise with my credit card usage. Before using these tips below, I was spending more in interest than the item cost initially. It was so frustrating because I was paying the minimum balance. I thought that was the way to do things. Once I got so deep in debt with my credit cards I stopped paying them altogether. I went back to school full time and no longer had any income. I had no idea that you could negotiate payments with the bank. I ended up closing the account and it really hurt my credit score.
After finishing school and starting a new job I swore off credit cards, thinking I was doing something good for my overall credit. That was a huge mistake! That hurt me more than anything else. I now know that wise credit card spending I can be used as a tool to help build my credit, and plays a role in my overall financial strategy. Here’s how to use your credit cards wisely and avoid falling into financial trouble.
Credit Card Tips
1. Understand How Credit Cards Work
Before swiping, it's important to understand what you're using. A credit card is essentially a short-term loan from a lender. Whenever you swipe your card, you agree to borrow from the credit card issuer (stores or banks) over a certain period of time. They expect you to pay them back late. That’s how the issuer makes their money. Don’t let them win! Instead, take the offensive and use credit cards for their benefits such as cash back and rewards.
If you don’t pay off your balance in full each month, you’ll be charged interest—often at a high rate. In addition, when applying for a credit card, a hard inquiry is run against your credit report. Think of it as a ding against you that can lower your credit score. I was strategic when opening a new account. I typically did not apply for a new credit card unless I knew I would be approved and I did not plan to apply for anything else for at least 6 months. That way my credit score had time to rebound from the initial inquiry.
2. Pay Your Balance in Full Each Month
The single best way to avoid credit card debt is to pay your balance in full every billing cycle. Please note, a billing cycle does not necessarily start on the first of each month. You can find the dates of your billing cycle on your credit card statement. This prevents interest from accruing and keeps your credit score healthy. If you can’t afford to pay the balance in full, aim to pay more than the minimum. Continue this strategy until the remainder of the balance is paid.
Don’t fall for the lie that it’s good to carry a balance from month to month. That’s not true at all! Paying only the minimum payment each month not only hurts your credit, but forces you to pay interest on your purchases. Then you end up paying more for the item overall than the initial price. When paying the minimum, the credit card issuer typically charges at least 15% interest on your remaining balance. That continues to compound until the entire balance is paid.
3. Keep Your Credit Utilization Low
Your credit utilization ratio—the percentage of your credit limit you’re using—should stay below 30%. A low utilization rate shows lenders that you’re not overly reliant on credit, which helps boost your credit score. Keep in mind, your utilization rate is measured across all your accounts, not individual accounts. For example, say you spend $15 on one credit card with a maximum of $100 and $40 on another card with a maximum of $200. Your credit utilization rate would be 18% total and not 15% for the first card and 20% for the second card respectively.
If you’re not sure of your utilization rate, use an app like Credit Karma to find it. Credit Karma offers a way to view your credit score, credit card balance, and account balances, as long as the accounts are linked to the app. When selecting Credit in the Credit Karma app, you can view the factors that lead to your overall score. Credit card usage is is an option that shows the usage percentage. It has a high impact on your overall score. If you click on it you can drill down to view where you land on the scale and all your open credit care accounts.
4. Track Your Spending
It’s easy to overspend with a credit card because you don’t see money leaving your bank account right away. I made this mistake often with my first credit card. Before I knew it, my balance was so much higher than what I thought. It becomes hard to keep up. To keep things simple, treat your credit card like a debit card: only spend what you already have in your bank account. When making a payment, it also takes a few days for the payment to be applied to your credit card account. Be careful to monitor your checking account that’s linked to your credit card payments so you don’t overspend.
You can use a budgeting app or tracker to stay on top of your purchases. I’ve tried using apps, but personally I prefer to use a Google Sheet. There’s a simplified version of this spreadsheet available on our website. Monarch Money offers a budgeting app that was voted #1 by the Wall Street Journal. Mint used to offer a free version, it has since been bought and sunset by Credit Karma. They now offer their own way to track your spending, but I don’t find it to be user friendly. No matter the method, I suggest taking your time to find what works for you. Besides, you can always change your mind if needed.
5. Choose the Right Card for Your Needs
Some cards offer cash back, travel rewards, or other perks—but those benefits aren’t worth it if they tempt you to overspend. I’ve grown my credit card portfolio over time. I’m continuing to grow it, but I’m very mindful when I open new accounts. If you can, stay away from store credit cards! The only one I’ve owned is Amazon. Because of my lifestyle, I use this card often for household purchases.
When picking a credit card, identify what aligns with your financial goals and spending habits. With me and my husband looking to purchase a new home soon, I’m not opening any new accounts until after that home is purchased. That way my credit score isn’t negatively impacted by a new account. Be mindful of any large purchases you’re looking to make in the next 6-12 months. Opening new accounts don’t make as big of an impact on your credit if you open them all within a 30-day window.
6. Set Alerts and Auto-Pay
Late payments can damage your credit score and trigger late fees. When I was struggling to bring in income I was scared to set up auto-pay. There were definitely times when my income was inconsistent and purchases would send my account into the negative. But when I started monitoring my accounts I could plan much better. I also decided to link a buffer savings account so my checking account, just in case I overspent. There was also so much mental relief I experienced after setting up auto-pay on my bills. I wish everyone could experience this type of peace.
Setting up payment reminders or using auto-pay ensure you never miss a due date. Payment reminders allow me to use my credit card for bill payments too. I love being able to get the rewards. The key is to pay off the bill as soon as possible. Alerts and auto-pay give you the system you’re looking for to set you up with credit card success.
7. Don’t Use Credit for Emergencies Only
Many people rely on credit cards for emergencies, but it’s better to build an emergency fund. That way, you won’t go into debt when unexpected expenses pop up. Don’t lie to yourself. Emergencies happen, but not that often. It’s better to be prepared with an emergency fund than to use credit cards as a safety net. I use my credit card on as many purchases as I can. I’ve even known people to put some of their car down payment on a credit card, but there are limits to how much money you can pay on a card.
It may sound counterintuitive, but using your credit card on regular purchases helps you to build your credit score. This can be on everything from groceries to eating out to going to the movies. When only using your credit card for emergencies, you don’t have the opportunity to build your credit. I know it sounds weird, but swiping your card and paying off your balances shows banks that your fiscally responsible. The longer you do this the more your credit score tends to increase.
8. Avoid Cash Advances
A cash advance is when you borrow against the available credit limit on your credit card. It’s technically a small loan, but the terms are very different than what you may know. Beware…cash advances come with high fees and immediate interest charges. While cash advances can be helpful for some people, for the majority it ends up ballooning into high interest payments. Typically, this means double-digit interest, which really hurts you if you’re trying to pay off debt. Forget this option even exists. It only hurts you in the long run.
A better option would be to get a small loan from a bank. It would have a much smaller interest rate. Keep in mind, if you’re looking to get out of debt or make a large purchase, it’s better to save than rely on credit cards to finance your lifestyle. The key to a strong financial portfolio is to start with a high yield savings account as your emergency savings, and then add investments such as stocks and bonds. You don’t even need a lot of capital. These are liquid options that, when needed, you can easily grab without any penalties. Please note, you will need to pay taxes on investments when withdrawing any funds. You’ll need to do your research to determine your taxable rate.
9. Review Your Statements Regularly
Check your monthly statements for errors or suspicious transactions. Don’t be afraid to open your statements! Even if you spent more in the past month than you planned, you’re only delaying the inevitable if you don’t check. In fact, things might get worse if you miss paying your credit card bill on time. The longer you delay, the more it negatively impacts your credit score. I’ve known friends to ignore emails or refuse to open their mail, afraid to open their mail for fear of what they owe. But when you have a plan for your finances, even a month of slight overspending can’t knock you down.
Also, early detection of fraud can save you money and protect your credit. Most credit cards allow you to easily dispute false transactions so you won’t be hurt by the charge. There are also additional securities, such as insurance on car rentals, that keep you protected. Then you won’t need to pay for the additional insurance when renting a car. Everyone loves saving money!
10. Build Credit, Not Debt
Using a credit card wisely builds your credit history and score, which can help you qualify for loans, rent apartments, or even land a job. But always remember: credit cards are tools, not free money. You are taking a loan from a company, for which they expect you to pay it back within a certain timeframe. Building credit shows businesses and creditors that you are a responsible borrower. This is especially important to landlords and employers.
For landlords, they want to know you will pay them on time. No landlord wants to hunt down the money owed to them each month. They believe that if you pay your debts on time, you’ll responsibly pay them for they the place you live. For employers, potential employees with a bad credit history are risky. They fear that a rival company may be able to bribe you if you owe a significant amount of debt to someone. No matter your skills, the employer doesn’t want to take the risk. Save them the trouble and have a positive credit history.
Final Thoughts
Credit cards can either be stepping stones to financial success or stumbling blocks to debt. By using them intentionally, paying on time, and staying within your means, you can reap the benefits without the burden. Take control of your credit—don’t let it control you.
What’s your strategy for staying out of credit card debt? Share your tips in the comments!
