How to Use Your Credit Card Correctly

The majority of us use credit cards on a daily basis, so it's pretty clear how integral a role they play in our lives, whether it's to buy ordinary things like groceries or even just to build up your credit rating.

Still, what sets these kinds of cards apart from some of the less risky financial tools — debit cards, for instance — is how much caution and responsibility you need to take while using them.

Unlike debit cards, where you're not actually borrowing any money (unless you're in an arranged overdraft), you're always in danger of falling into a cycle of debt when using a credit card, so it's absolutely crucial that you understand how to avoid this and make the most of the benefits it offers.

So, over the course of this article, we'll be taking a look at general credit card etiquette and how you can actually take advantage of such a useful everyday tool without getting into any financial bother.

Understanding Your Credit Card

Let's kick things off by exploring a few of the basics you need to be aware of when using your credit card.

Know Your Credit Limit

It goes without saying that your credit limit isn't just a number (or even a target that you're trying to reach) in your bank account; it's actually a kind of boundary that puts, as the name suggests, a limit on your ability to borrow money with your credit card at any given time.

Don't worry if you're slightly unfamiliar with how this works; we'll delve a bit deeper further on in the article — put simply, though, you'll get given this limit by your credit card provider, and it's typically based on your creditworthiness and income (but there are a few other factors we'll come onto later).

Ultimately, the main takeaway here is that it's absolutely paramount to be aware of what your credit limit actually is since exceeding it can actually have pretty significant repercussions.

Just to list off a few of these consequences, whenever you surpass your credit limit, you generally stand to face something called over-limit fees, which are basically a kind of penalty for using more credit than you were provided with.

Obviously, this adds to your debt burden pretty heavily, especially if you're so far over your credit limit that you're struggling to pay it back, only dragging out how long you have to pay interest fees.

Aside from this, though, whoever issued your credit card is probably going to report your over-limit status to all the credit reference agencies, which is also going to have a negative impact on your credit rating.

Credit utilisation, essentially meaning the percentage of credit you're actually using, plays a major part in deciding your overall credit score, so having a firm understanding of your credit limit is definitely one of the first steps in using your credit card responsibly.

Credit Card Balance

This basically means the amount of money that's in your account and it'll obviously change every time you make a purchase or incur some kind of interest charge.

Still, it's worth getting into your head that this balance isn't literally just the sum of all of your recent purchases because it also includes things like any of the outstanding debt you have from previous billing cycles.

You need to be pretty vigilant to manage your credit card balance effectively so that you can avoid ever having to pay interest — in practice, this basically just means aiming to pay off the whole balance in full before it is due each month.

Having said that, certain credit card providers actually charge something called early repayment fees, so don't get ahead of yourself and pay the balance off literally as soon as you can; wait until the appropriate time.

Ultimately, if you end up carrying a balance forward into the next month, that's where the interest charges are really going to start stacking up, so this is naturally going to make it even harder to get out of a debt cycle.

To keep on top of this, you might just want to review your credit card statement fairly regularly so you're able to properly keep track of your balance and generally avoid finding any unexpected surprises waiting there for you.

Interest Rates

Another one of the main fundamentals you need to come to terms with when using your credit card is what the interest rates are for the card you have, as this essentially is going to determine how much you'll end up having to pay if you somehow find yourself carrying a balance into the next month/billing cycle.

Basically, your credit card provider is going to charge interest on however much your outstanding balance is when you don't completely pay it off by the due date, and the figure that represents this fee is known as the Annual Percentage Rate (APR)

The APR also includes things like any additional fees or charges you might have incurred, but we'll explore this a bit further in the next section.

Introductory Interest-Free Period

One of the best and generally most enticing features of many credit cards is the fact that they have something known as an introductory interest-free period — sometimes simply known as a 0% APR period.

Essentially, throughout this grace period (which tends to last several months, even up to a whole year, depending on the offer you find), you're not going to be charged any kind of interest on the balance that you are carrying.

Obviously, this is by far the best opportunity you'll ever have to make fairly significant purchases or even just transfer balances from other cards with higher interests so that you're able to save on interest payments.

In fact, the latter point is the very nature of certain cards called Balance Transfer Cards, which take advantage of just that — providing you with 0% APR for a fixed period of time so that you've got an opportunity to pay off any debt you have without incurring even more fees on top of that.

Still, even with these cards, the regular APR is going to come into play once the introductory interest-free period finally expires, and, generally speaking, the interest rates are normally ridiculously high.

So, if you are opting for balance transfers, you've got to be very careful you don't still end up being in debt by the time this period ends, or you'll quite easily be back to square one.

So, in order to actually make the most of this offer, it's crucial to know when the introductory interest-free period is going to start and finish.

As touched on, missing this deadline definitely has the potential to result in some pretty nasty interest charges, so you'll always want to go into this with some kind of budgeting plan and strategy of how you're going to pay off your debt.

Making Credit Card Purchases

Now that we've got some of the basics out of the way, let's take a closer look at some general responsible behaviour that you should adopt whenever you're actually using your card to make payments:

Use Your Credit Card for Planned Expenses

Following on from the previous point of needing to have a plan for when you're budgeting, credit cards actually help you out a lot here due to how useful they are for tracking expenses.

Aside from just taking a look at your credit card statement every month, the majority of credit card providers out there tend to offer some kind of budgeting section on their mobile banking app, even letting you categorise certain expenses so that you're able to see what parts of your lifestyle are costing you the most.

Generally speaking, though, it's best just to use your credit card for planned expenses rather than frivolous spending when you're down the pub, for instance. Think of expenses like your groceries, utility bills, and even online shopping — these are all the best ways you can monitor some of your spending.

Avoid Cash Withdrawals

As a general rule of thumb, using your credit card to withdraw cash should pretty much always be a last resort.

The severity of them is always going to depend on which provider you're with, but for the most part, credit card cash withdrawals almost always come with excessively high fees and immediate interest charges, so this is probably one of the most expensive ways to access your cash.

If you absolutely need cash for whatever reason, you'd definitely be better off simply using your bank account or a debit card instead so that you do not have to deal with all those cash withdrawal/ATM fees.

Buy Foreign Currency Wisely

If you're travelling abroad, whether it's for some business-related reason or you're looking to study overseas, using your credit card for any kind of foreign currency transactions is naturally the most convenient way to access your money since you don't have to deal with foreign currency bureaus or wait for physical cash to get delivered to you.

Having said that, quite a lot of mainstream credit card providers aren't so charitable when it comes to this and may charge you pretty hefty additional fees for any foreign currency transactions you make.

Still, depending on your credit card provider, these can be dealt with effectively. Monzo, for instance, calls itself a bank card that's ‘made for travel', literally meaning that you can spend money wherever you like in the world with one of their cards without incurring any foreign transaction fees.

This goes for any cash withdrawals you might need to make, too, as they also allow you to withdraw for no fees whatsoever if Monzo is your primary bank account.

Still, if you're not interested in using Monzo for whatever reason, just try to compare various foreign transaction fees among credit card providers to some of the other options out there so you can find the most cost-effective method for your needs — the classic method of exchanging currency at a bank or even using a prepaid travel card, for instance.

Managing Your Credit Card Balance

Let's revisit the topic we were talking about earlier to see how you can deal with a credit card balance and how you can prevent carrying it over into the following month or billing cycle.

Pay More Than the Minimum

In general, you'll find that credit card statements tend to include a specific amount for minimum payments you can make.

So, while it's obviously crucial that you're at least making this minimum payment by the due date every month (so that you're able to steer clear of late fees and damage to your credit history), only paying this minimum amount is still going to result in interest charges on whatever the remaining balance is.

To avoid ever having to pay interest here, simply try and pay your credit card balance off in full each month.

Set Up a Direct Debit

One of the best ways you can ensure that you're never going to miss a payment is by setting up a direct debit that essentially pays your credit card bill for you each month automatically.

Whether you choose to pay off the minimum amount, full balance, or even just a fixed amount each month, ultimately, just be sure that you're monitoring your credit card statement so you know if you've actually got the funds in your bank account to cover all the payments.

Protecting Your Credit Rating

Let's round things off by taking a look at what you can do to maintain a fairly positive credit score.

Keep Your Credit Utilisation Low

We talked a little about this earlier, but to recap, credit utilisation essentially refers to the percentage of your credit limit that's currently being used.

In terms of the factors that can have a negative impact on your credit rating, high utilisation is actually the second most important factor, so in an ideal world, you'd always want to keep this percentage below at least 30% of your total credit limit.

Ultimately, this proves to your lenders that you're not relying too heavily on your credit card for your everyday financial health and that you're able to manage your overall finances by yourself.

Close Unused Credit Accounts Carefully

Though it is generally advisable for you to keep older credit accounts open (since they can positively impact your credit history's length), it's definitely worth considering closing any accounts you have that are either unused or just have high fees that could tempt you to overspend.

Still, as mentioned, be mindful of how closing them might affect your credit utilisation and credit history length.

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