Responsible Credit Card Usage

by Nina Chamlou

Updated April 12, 2023

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Applying for a credit card can be daunting, especially if you have no or poor credit history. In turn, this can limit which cards you can apply for to ones that charge excessive fees or exorbitant interest rates. You may feel tempted to put off this tedious task for another day, but getting a credit card helps build your credit. Even if you don't envision yourself applying for a mortgage, a car loan, or a business loan in the near future, start building your credit now in anticipation of the day that you need a favor from your bank. But before you do, read our guide to learn how to use credit cards responsibly.

% Americans w/ First Credit Card	Age
58.3%	>20
30%	21-24

Source: Motley Fool

Why Get a Credit Card?

One reason to own a credit card is to build your credit score, which measures how reliable you are at paying your debts. If you establish a history of making payments on time and managing debt responsibly, you likely have a good credit score.

Credit scores fall in a range of 300-850. The higher the score, the better your credit is considered by potential lenders. The number is calculated using your on-time payments versus late payments, public records, the length of your credit history, and amounts owed.

Establishing good credit is not only essential to qualify for loans, but also in determining the interest rate that you will end up paying on a loan. The better your score, the lower the rate. The difference could amount to thousands of dollars.

Some credit cards offer sign-up bonuses when you open a new account. Bonuses can include airline miles, hotel points, or cash. Usually, these bonuses require you to spend a certain amount of money on your new card within the first few months to earn them. The higher your credit, the more likely you are to qualify.

Unlike debit cards, credit cards provide full protection against fraud. If you see charges on your credit card statement that you didn't make, you can report them and avoid paying any more than $50, thanks to the Fair Credit Billing Act.

Before you begin the process of choosing a credit card, you should check your current credit score, which will determine the type of credit card for which you will qualify.

Then, you can consider what benefits you want in a credit card to help narrow down your options. Credit-building credit cards cater to people with no or low credit looking to establish credit. Balance transfer credit cards cater to those that need to pay off debt. Once you've determined which perks you want, you can narrow your search.

Ironically, getting your first credit card without credit can prove challenging. If you're under age 21, federal law requires that you verify your income to qualify for a credit card without a cosigner. If you don't have income yet, but you'd like to start building your credit now, you'll need to find someone to either make you an authorized user on one of their cards or open a joint card with you.

Note that the more credit card applications you send, the more rejections you'll get. This occurs because your numerous inquiries make you look desperate to lenders. So, avoid applying for multiple credit cards at once.

Using Credit Responsibly

The most important rule of how to use a credit card responsibly is to pay off your balance each month. Lenders determine your credit score based both on whether or not you make payments on time and how much credit you have available to you. Your goal should be to pay in full on time each month and spend well below your credit limit. Experts say 30% or below is best.

Budgeting your spending is an important practice to prevent damaging your credit. Even if your credit card limit is high, you don't want to make charges that you can't pay at the end of each month. Credit card interest rates are particularly daunting. This is an easy mistake to make if you're not careful. Budgeting apps can help you track your spending so you don't accidentally rack up a bill that you can't feasibly pay.

You should also regularly check your credit score to monitor your progress and make sure your credit score is slowly rising. A 2021 investigation from Consumer Reports showed that a surprising 34% of consumers found at least one mistake in their credit reports.

You can access a free credit report at AnnualCreditReport.com, which allows you to request reports from any of the three major credit reporting agencies: Equifax, Experian, and TransUnion. Your credit card company may also offer you the option to monitor your credit score, so you should contact them directly to inquire.

As previously discussed, credit card ownership provides more security than debit cards, as you are not liable for fraudulent charges. However, you should regularly check your credit card statement to ensure all charges have been made by you. Call your credit card company immediately if you see any fraudulent charges so that they can freeze your card.

The Dangers of Misusing Credit

If you don't pay the full amount that you owe on your credit card by the payment due date, you will begin to accrue debt and will be charged interest on the remaining balance.

The average American holds $6,194 in credit card debt, according to Experian. The average credit card interest rate was 16.28% in 2020, according to Federal Reserve data.

So, the average American consumer pays $1,008.38 per year to their creditors, or about $84 per month, just in interest.

Research from the American Bankers Association shows most cardholders with active accounts carry a balance from month to month (40.70%) instead of paying in full (33.70%.) The remaining 25.6% are dormant accounts.

When you can't make minimum payments, a few things happen. First, you can expect to pay late fees, potentially receive increased interest rates, and see dings to your credit score. If you continue to miss payments, your bank can freeze your card. Eventually, your debt could be sold to a collection agency, which could sue you and even have your wages garnished.

For more information on how to use credit cards responsibly, check out ACO's series dedicated to credit, including articles on How to Boost Approval Odds, Online Budgeting Apps, and Common Financial Misconceptions.

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