Credit Card Basics—How To Use a Credit Card Responsibly
According to TransUnion, the number of credit card users rose to 166 million in Q4 of 2022, marking a notable increase from the previous three years. Despite the widespread popularity of credit cards, many users fail to use this payment method properly and succumb to debt.
For the first time in history, the total credit card debt in the U.S. surpassed $1 trillion, as reported by the Federal Reserve Bank of New York. One thing you can do to avoid becoming part of this alarming statistic is familiarize yourself with credit card best practices. That way, you can reap the card’s benefits while minimizing the risk of financial pitfalls.
This article aims to educate you on proper credit card use. Besides answering how to use a credit card responsibly, you will also learn:
- Why is it important to use a credit card properly?
- What are the dangers of using credit cards online?
- What is the safest way to conduct purchases with credit and debit cards?
What Is a Credit Card?
A credit card is a type of payment card issued by financial institutions such as banks and credit card companies. With this card, you can borrow funds up to a certain limit and use them to make purchases and other transactions.
While debit cards require you to keep money in your account and draw funds directly from it, credit cards allow you to borrow funds and repay them later, usually on a monthly basis. For this reason, many consumers choose to use credit cards for emergency expenses when they don’t have the cash on hand.
Besides the borrowed amount, you may also be required to pay any applicable interest and additional agreed-upon charges, either in full by the billing date or over time.
Credit cards come with many advantages:
- Credit score building—A credit score is a number representing your creditworthiness. It’s calculated based on several factors, such as your payment history, credit utilization ratio, and credit history length. The higher the credit score, the higher your chances are of securing low interest rates and favorable lending terms.
- Reward programs—Credit cards typically have various reward programs catering to different spending areas. The rewards include redeemable points, cashback for certain purchases, and travel perks.
- Credit card protection programs, such as purchase and fraud protection—Credit cardholders can file a dispute for unauthorized or wrongful billing, such as in the case of undelivered or damaged goods and fraud.
The Importance of Using a Credit Card Properly
When spending with a credit card, you typically have to repay borrowed funds monthly before the specified due date. The total amount of borrowed funds you must repay is called the balance. If you don’t pay off the balance in full before the due date, you’ll likely be charged interest. That means you’ll need to pay more than you initially borrowed from the credit card issuer, usually a predetermined percentage of the total. An unpaid balance carries over from month to month, accumulating interest and debt.
High interest and debt can have many consequences for the cardholder, such as:
- Negative impact on credit score
- Limited financial freedom and lack of stability
- Difficulty acquiring new credit or loans
- Legal consequences, i.e., court proceedings and potential asset loss
- Long-term consequences, such as the inability to save for retirement
- Emotional distress
How To Use a Credit Card Responsibly
If you learn how to use a credit card wisely, this payment method can offer substantial benefits. Responsible use of a credit card entails:
- Choosing the right credit card
- Paying off your balances on time
- Staying within your budget
- Working to increase your credit score
- Tracking account activity and detecting possible fraud
Choosing The Right Credit Card
You should carefully research your options to find the optimal credit card that fits your lifestyle. Start by observing your spending habits. You should identify where you make purchases frequently and what you spend money on most. Select the card that offers rewards for such transaction types or merchant categories. For example, if you travel often, a card with travel rewards like airline miles and hotel discounts might be the best choice for you.
Another factor to consider is the card’s eligibility criteria. Some credit cards, especially those with generous reward programs, entail stricter criteria, such as a higher credit score. In any case, you must be over 18 years old and have a steady source of income.
It’s important to read the terms and conditions before settling on a card. Check its interest rates, payment due dates, and fees, ensuring they align with your financial capacity and spending habits. For instance, if you shop outside of the U.S. frequently, you may want to choose a card with low or non-existent foreign transaction fees.
Although many credit card providers offer rewards and introductory bonuses, it’s necessary to read the fine print. In order to qualify for most introductory offers, you need to spend over a certain amount in a relatively short period of time. Before jumping on this kind of offer, be sure you can not only spend the minimum amount but also pay it back on time.
Paying Off Your Balances on Time
One of the most crucial responsibilities of credit cardholders is paying off statement balances in full each month before the due date. As payment history makes up 35% of your credit score, missed payments can severely impact your creditworthiness. Even a single late payment can cause significant issues, leading to:
- Penalty fees
- High interest
- Accumulation of debt
Many issuers provide a grace period, which is an additional period after the cycle’s due date, during which you won’t be charged interest or fees. However, if you miss payments, you run the risk of losing this benefit. To stay on top of your payments, consider setting up auto-pay or create reminders on your phone.
A common misconception among inexperienced cardholders pertains to minimum payments. Issuers calculate the minimum payment based on monthly balances, which you must settle to fulfill the contractual obligation and avoid late fees. Although paying the minimum keeps you in good standing with your credit card company, the remaining unpaid balance will transfer to the next month with interest, resulting in a higher payment down the road.
Staying Within Your Budget
All credit cards come with a limit. If you exceed it, your payment could be declined. You may also be subject to over-limit fees, interest, or even account closure. You should not only avoid exceeding the limit but also aim to use as little of your credit as possible. This advice is based on the credit utilization ratio (CUR).
The credit utilization ratio is the second most impactful credit score factor after the payment history. The CUR compares the amount of credit used to the total amount of credit available. A common rule of thumb is to keep the ratio under 30% to avoid a negative impact on your score. Ideally, you should keep it under 10% for an excellent score.
To keep your CUR low and stay within budget, spend only what you can afford to pay back, abstaining from large impulse buys. Keep track of your credit usage with a budgeting tool and consider the mandatory monthly payments.
Working To Increase Your Credit Score
The first step to maintaining a solid credit score is understanding how it’s calculated. In the following table, you’ll get an overview of all credit score factors and how much they influence the total score:
| Factor | How Much It Affects Your Credit Score |
How It Works |
|---|---|---|
| 35% | Paying bills regularly and avoiding late payments will lead to a higher score. |
|
| Credit utilization ratio (CUR) |
30% | The lower the CUR, the higher the score (under 30% minimum, under 10% ideal). |
| Credit history length |
15% | This metric represents the age of your credit card accounts. The longer your credit history, the higher your credit score. |
| Credit mix | 10% | Having multiple types of credit indicates proper management skills and raises the score. |
| New credit | 10% | Opening too many new accounts over a short period can signify instability and lower the credit score. |
Besides settling up your balances and keeping your CUR low, there are a few other ways to maintain a favorable credit score:
- Keep old accounts—Even if you don’t use it and have a new one, hold onto your oldest credit card account to preserve your credit history length and increase your score. If you truly have no use for the card, you may be able to switch to a different card with the same account.
- Don’t apply for too many credit cards—Although the credit bureaus value credit variety, you shouldn’t apply for too many new accounts at once. This suggestion also goes for multiple failed applications with the same issuer. If your application was denied several times, wait a few months before trying again.
- Get a secured card—A secured card requires a deposit, which equals the credit limit or a portion of it, and acts as collateral in case you can’t make payments. This type of card is ideal for those who need help building or rebuilding their credit score. If you demonstrate responsible card use, you may be able to transition to unsecured and traditional cards.
Tracking Account Activity and Detecting Possible Fraud
Monitor your account to stay on top of your spending. Activate alerts to get notified when:
- Your monthly payment is almost due
- You start approaching the credit limit
- Your card is used for transactions
Besides keeping you informed about your current balances, these alerts can help you detect fraud timely. Be sure to check each notification to verify the charge’s legitimacy. If your card was lost, stolen, or if you notice an unauthorized charge, you should pause or cancel the card to prevent further activity.
Most consumer credit cards come with robust fraud protection measures backed by the Fair Credit Billing Act, but it’s still crucial to act quickly if you notice a suspicious charge on your statement.
Credit Cards vs. Debit Cards—Protection and Everyday Use
Unlike credit cards, which let you borrow funds, debit cards allow you to access available funds from your checking or savings accounts. Debit card transactions deduct funds from your account directly and immediately.
While debit cards typically lack benefits such as rewards (with some exceptions), they may be a more suitable choice for everyday expenses because they allow you to:
- Control your spending—With a debit card, you can’t spend more than what’s in your account, so you won’t be tempted to accumulate debt.
- Avoid fees and interest—Unlike credit cards, debit cards don’t accrue interest and typically have minimal fees.
- Access cash—When you want to withdraw cash from an ATM, credit cards usually charge a substantial cash advance fee. There is typically no fee associated with withdrawing cash from your account using a debit card.
Credit and debit cards both come with fraud protection measures, but they’re protected by different laws. In the case of credit cards, the law is more favorable for cardholders, whereas debit cards may come with a time limit for filing disputes and impose stricter liability criteria.
Although card issuers often have zero-liability policies, absolving you of monetary responsibility in case of fraudulent charges, the process of dealing with the consequences of credit or debit card fraud can be arduous. For this reason, it’s better to put fraud prevention practices in place than to deal with the problem later—you should invest in your online payment security regardless of the type of card you’re using.
Enhance the Security of Your Credit or Debit Card Data During Transactions
According to Security.org’s 2023 research, over 65% of debit or credit cardholders have experienced fraud at least once in their lifetime, a considerable increase compared to the previous year’s 58%.
As technology evolves, so does fraud. Fraudsters no longer have to steal or skim physical cards—from phishing to data breaches, there are numerous methods for obtaining your sensitive information online.
Once they have your card data, perpetrators can sell it and use it to make fraudulent transactions or create fake cards. These scenarios can significantly affect the victim’s life, inflicting financial, reputational, and emotional damage. That’s why you should do your best to protect your data and prevent it from getting stolen in the first place.
Virtual cards have recently emerged as a simple and effective way to protect your financial information during online transactions. A virtual card is a randomly generated card number with its own expiration date and security code, which you connect to your existing funding source, such as your debit card or bank account. Virtual cards allow you to make purchases without disclosing your actual financial data, protecting it in case a hacker infiltrates the merchant’s server.
Many card issuers offer virtual cards to existing users, but bank-agnostic virtual card providers like Privacy give you more customization options and robust security features.
Protecting Your Card Information With Privacy
By using a Privacy Virtual Card, you’re adding an integral layer of security to your online transactions. If a site you’ve shopped with suffers a data breach, hackers will only be able to access your virtual card data, and your actual bank account or debit card will remain protected.
With Privacy, you can generate two types of cards:
| Type of Card | How It Works | How It Protects You |
|---|---|---|
| Single-Use | You can use this card only once, as it closes shortly after the first payment is made. | The card data becomes useless to hackers even if they manage to steal it. |
| Merchant-Locked | You can use this card multiple times, but only with a specific vendor. | Similarly, if a hacker obtains the card information, they can’t use it anywhere else. |
You can use your Privacy Virtual Cards at most local or global merchants that accept U.S. credit or debit cards. U.S. residents over 18 with a checking account at a U.S. bank or credit union are eligible to request Privacy Cards, and they’re compatible with most U.S. banks.
Virtual Cards With Robust Controls
After generating your cards, you can also:
- Set spending limits—If you specify a limit on your virtual card, Privacy will decline all exceeding charges. Doing so will help you stay within your budget and prevent sneaky merchants from overcharging you.
- Pause and close the virtual cards—You can easily pause or close a card without impacting your bank account or debit card. Privacy will decline all further charges on the paused or closed card. This feature is particularly useful when you’re dealing with unwanted subscription charges.
- Check out seamlessly—The Privacy browser extensions, available for Chrome, Firefox, and Safari, auto-fill card details for you at checkout. You can shop quickly and seamlessly without having to reach for your wallet or type in card numbers.
- Receive real-time alerts—With the Privacy mobile app for iOS and Android, you can create and manage cards anywhere and anytime. You can also receive notifications whenever your cards are used or declined, which will help you identify potentially suspicious activity timely.
Sign Up for Privacy and Enjoy Enhanced Security
To become a Privacy user and fortify your online security, you should:
- Go to the signup page
- Enter the information necessary for verifying your identity
- Connect a bank account or debit card
- Request a Privacy Virtual Card
With the basic plan, you can generate up to 12 virtual cards a month. You can pause or close the cards, set spending limits, and access the browser extensions and mobile apps. Paid plans get you additional cards and features such as priority support, 1% cashback on eligible purchases (totaling up to $4,500 a month), and dedicated account management.
Privacy is a BBB®-accredited company that employs top-of-the-line security measures to keep its users’ data safe, such as split-key encryption and distributed storage.
