Takeaways
- Credit cards are payment cards that use a bank or credit union line of credit.
- Credit cards have cashback rewards, travel points, and promotional offers.
- Credit cards help with managing monthly expenses and the timing of cash flow.
- Credit cards provide transaction protection, fraud prevention, and security features.
- Credit cards benefit new holders by offering an avenue to build a credit score, manage debt payments, and diversify their credit lines.
What Are Credit Cards?
Credit cards are critical financial payment cards that consumers and businesses use to seamlessly pay for goods and services. They are issued by banks, credit unions, and credit card companies to consumers with good credit scores and give them a line of credit with a set credit limit. Your credit limit includes both purchases and cash advances.
When you use a credit card, you take out a short-term loan from the card provider. You must repay this loan in full monthly or make minimum monthly payments. Each month, you receive a credit card statement detailing the transactions you made throughout the month and your total payment due. You can avoid paying high annual percentage rates (APY) on your unpaid balance by paying off your monthly credit card balance. These interest payments can add up quickly, so you need to manage your credit card effectively.
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On Pesto’s Website
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Smart Money Rating: 4.75/5
APR: 29.99% % (Rates Vary)
Best For: Rebuilding Credit
Required Credit Score: No Credit Score Check
How to Use Credit Cards Responsibly
Using credit cards responsibly involves keeping close tabs on your spending, payments, and credit reports. Credit cards offer a seemingly endless well of credit that most consumers must use to avoid getting caught in a cycle of overspending.
Personal finance experts advocate for only charging what you can afford to repay every month while still staying within your budget. Once you receive your monthly credit card statement, it is imperative to pay your balance each month to avoid interest charges and ensure a high credit score. If you cannot afford to pay your balance in full, you should at least make the required minimum payment to decrease your credit card debt and minimize interest.
If you apply for a credit card, it is best practice to implement some credit card hygiene, which includes regularly monitoring your credit card statements. This means checking for unauthorized transactions, errors, or incorrectly applied credits.
Another major tip is to keep your credit utilization low. Credit utilization is the ratio of credit used relative to your total credit limit. Most finance experts advocate for keeping your credit utilization below 30%.[1]
Making on-time payments is another significant variable in improving your credit score. Decreasing your debt load can also improve your credit utilization.
While using your credit card responsibly, you should use your cashback rewards and travel benefits wisely without incurring additional debt. For example, applying your cashback reward to your credit balance can help reduce the cost of purchases rather than using it to spend even more money.
Read More: 5 Steps to Apply for a Secured Credit Card
7 Reasons to Use Your Credit Card
Credit cards can be highly effective and easily managed payment cards. Here are seven reasons keeping a credit card (or two) in your wallet can be a great idea to improve your finances:
1. Secure Purchases
Credit cards are one of the most secure forms of payment because they offer substantial security for your transactions. Using a credit card generally gives you automatic fraud protection that keeps you safe from unauthorized charges.
Fraudulent transactions on your credit card don’t leave you out of cash. This is not the case with all payment cards. For example, with debit cards, fraudulent transactions remove cash from your account until the bank resolves the issue.
With a credit card, you simply inform your bank or credit card company of fraud and wait until the credit card company resolves the issue. This protects cash in your checking or high-yield savings account. Most cards have zero-liability policies that keep you safe if you report them immediately.
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Quontic High Yield Savings Account
Smart Money Rating: 5/5
APY: 4.50%
Required Minimum Balance: $100
2. Widespread Acceptance
Applying for a credit card can be a smart money move because credit cards are virtually universally accepted forms of payment, which makes them incredibly convenient. They are the primary means of paying for purchases online, and point-of-sale systems can even store your information for seamless processing.
Brick-and-mortar businesses, such as restaurants, cars, grocery stores, and toy stores, also use credit cards as a primary source of payment. In fact, many companies have gone cashless.
The widespread adoption of credit cards has gone even further over the last several years because payment apps that use your credit card information, like Apply Pay, have become even more ubiquitous.
3. Building Credit
Building a good credit history is one of the best ways to use a credit card responsibly. On-time payments and a modest credit utilization rate boost your credit score quickly, and a strong credit history shows you can use and manage credit effectively.
If you are considering making another large purchase, like buying a new car or purchasing your first home, that you need to finance, getting a healthy credit score can reduce your cost of borrowing and give you better terms.
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Best For: Building Credit by Reporting Rent
Average Boost: +40 Points on Credit Score in 10 Days
4. Sign Up Promotions
Credit card companies are always competing for new business. This competition can add money to your pocket. Many credit cards offer super attractive sign-up bonuses or promotions, like massive bonus rewards points or expanded cashback advantages within the first few months.
These promotions usually require a minimum spend within a set term. For example, you might need to spend $3,000 in the first three months to get travel reward points. However, these add substantial value to a new credit card and can ramp up early rewards, making the cost of conversion to a new credit card well worth the effort.
5. Cash Back Rewards
Cashback credit cards reward users by effectively discounting their purchases. These cards take a percentage of the purchase price and refund this amount to the cardholder. Cashback cards usually range from offering 1-5% cash back (some go even higher).
You can accumulate these cash rewards and apply them to your credit card balance, put them in your online checking account, or add them to your savings account. Some credit cards have unique programs with vendors that allow you to convert your cashback points into gift cards.
6. Rewards Points
Many credit cards offer a unique rewards program. These programs give cardholders a rate of points per dollar spent on a credit card.
An initial tranche of points is earned by signing up for the credit card; subsequent points are earned after you pay off your monthly bill. After these points are awarded, they can be redeemed for merchandise, gift cards, or vacation and travel experiences.[2]
7. Frequent Flyer Miles
Travel lovers tend to gravitate to credit cards with special frequent flyer mile programs. These programs can benefit travelers tremendously, saving them hundreds or thousands of dollars.
When you use these cards for purchases, you earn miles that can be redeemed for free flights, access to exclusive lounges, seat upgrades (hello first class), or waived bag-check fees. These programs can make traveling much more fun, affordable, and relaxing.
When Not to Use Your Credit Card
While there are plenty of situations where using your card is the preferred payment method, there are certain situations when it might be less than ideal.
One of the most critical situations to avoid is using your credit card to make purchases you cannot afford to pay later. Overspending could cause a debt spiral. You should stop using your credit card for daily expenses if you are taking on unnecessary debt or your credit utilization ratio becomes too high.
Using your credit card for a credit card cash advance could also cause a financial issue because it typically charges high interest rates and fees.
If you need access to cash quickly, here are some other avenues to explore:
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Smart Money Rating: 5/5
Best For: Fast Online Loans
Loans From: $1,000 – $50,000 (Terms Apply)
Bonus Offer: Checking Interest Rate Won’t Affect Your Credit Score
Smart Summary
Credit cards are payment tools that can be used to manage your daily spending, accrue bonus points, and alleviate cash flow needs. Using your credit cards responsibly will keep you out of credit card debt and help you actualize the benefits of the credit product. Credit cards offer tremendous advantages like transaction protection, fraud prevention, and rewards that other payment cards, like debit cards, simply don’t provide. Get ahead of the game and apply for a credit card that best suits your personal finance needs.
You Might Also Like:
(1) Consumer Financial Protection Bureau. Credit score myths that might be holding you back from improving your credit. Last Accessed January 14, 2025.
(2) FDIC. Rewards Cards – Minimize the Pitfalls, Maximize the Benefits. Last Accessed January 14, 2025.
