A Guide to Using Credit Cards Responsibly

Credit cards are one of the most versatile personal finance tools available. They offer convenience and security and can help you build your credit score, boost your financial wellness, and provide opportunities to earn rewards. Credit cards often get a bad rap, but when used wisely, they can be a tool to build or improve your credit while offering valuable perks and benefits.

The Focus Federal Credit Union is here to guide you through proper credit card usage with this complete guide to using credit cards responsibly.

Benefits of Using Credit Cards Responsibly 

Ready to take the next step on your journey to financial success? Owning and managing a credit card gives you access to the borrowing power you need. Although you might think of credit cards as an alternative to cash, they’re not only a tool for transactions. They can be a convenient avenue to spend your way to long-term financial success. A surprising number of benefits are packed into a small piece of plastic.

Builds Credit

Understanding how a credit card affects your credit score is essential for getting and using one wisely. Payment history and credit utilization comprise a big part of your credit score. But the score also factors in your credit type, history, and recent credit card applications. 

Lenders use the FICO model credit scores to determine financial risk. A higher credit score demonstrates you’re a responsible borrower. Scores range from 300 to 850 and are rated as:

• Poor: 300-579
• Fair: 580-669
• Good: 670-739
• Very Good: 740-799
• Exceptional: 800-850    

To determine your score, the model weighs:

• Payment History. Payment history is the most influential factor in calculating your credit score, accounting for 35%. Payments made more than 30 days late are reported and hurt your credit. While late or missed payments drag your score down, building a history of on-time payments can help boost your score. Certain card issuers provide a grace period to pay your bill.
• Credit Utilization. Your credit usage, commonly known as a Credit Utilization Rate (CUR), is the second-most significant factor. Your CUR is the amount of credit used compared to the total amount available. For example, if your card limit is $8,000 and you have a balance of $2,400, you’re using 30% of your available credit. A high CUR can significantly damage your credit score, while keeping it under 10% can help your credit.
• Length of Credit History. Your credit history comprises 15% of your FICO score. The longer your credit history, the better your score. Keep old accounts open, as they will help increase the length of your credit history.
• Credit Mix. Your different types of credit accounts play a role. Your credit mix factors 10% of your credit score and demonstrates how you manage various credit accounts.
• New Credit. Most card issuers make hard inquiries during the application, which may temporarily hurt your credit. Too many inquiries and accounts can indicate increased risk, hurting your scores. 

Offers Rewards

Credit cards can be lucrative because of their high reward potential. Issuers generously reward healthy credit card habits with airline miles, reward points, and other fun benefits. 

Rewards come in three options: cash back, points, or miles. Fixed-value point rewards — points you earn for each dollar you spend – can then be redeemed for things like merchandise, services, gift cards, or access to exclusive clubs. 

Cash back cards return a percentage of the money you charge as a rebate, usually 1-2% of each purchase. With miles, you earn travel-related benefits for each dollar you spend.  

Consider which type of reward matches your spending habits. Would you benefit from earning cash back on gas or groceries? Do you want to earn hotel discounts or airline miles? After narrowing your options, look at each card’s terms and conditions to know potential fees, payment due dates, and restrictions on using benefits.

With FFCU Platinum and Classic MasterCard, you can earn rewards for everyday purchases and redeem points for travel rewards, gift cards, merchandise, or cash back.

Provides Purchase Protection

Your credit card may help if you dispute a charge or return a defective product. Sometimes called “damage protection,” purchase protection helps cover the cost of repairing or replacing belongings bought with the card. 

Depending on the card, the coverage amounts and the duration of the protection may differ.

Offers Fraud and Identity Theft Protection

Fraud and identity theft are major risks. If someone uses your debit card, your account could be depleted. But if a thief steals your credit card number and makes purchases, they can’t siphon money from your bank account.

Most credit card issuers offer zero liability fraud protection, meaning you owe nothing, and they handle fraud. You typically have 60 days to alert your card issuer of fraudulent charges. If you notify them after this time, you may be on the hook for the purchases.

To stay protected:

• Be Proactive. You don’t have to wait for your monthly statement to review your transactions. Set up account alerts to notify you of account activity. 
• Keep Records. Keep your receipts so you can compare them with your charges.
• Communicate. Notify your card issuer of any transactions you don’t recognize.
• Report. Report a lost or stolen card immediately to your credit card company.

Benefit From Convenience 

A credit card is often more convenient and takes up less space in your wallet than cash. Plus, if you lose your wallet or get robbed, any cash you carry is almost certainly gone forever. When using a credit card, there’s a trade-off between security and convenience.

Understanding Credit Card Terms and Conditions

A credit card is simply a revolving line of credit. It allows you to charge at any time, up to a specific limit. Each time you swipe, the credit card issuer is lending you money to make the purchase. Unlike a loan, a credit card account has no fixed term. 

At the end of each billing cycle, you can make the minimum required payment, pay the balance in full, or make a payment between these two amounts. If you can’t pay your balance in full, you pay an interest rate on the outstanding amount, known as the annual percentage rate. 

Not all credit cards are created equal. Certain card companies charge annual fees, fees for balance transfers, cash advances, exceeding your credit limit, or other actions. Choose a card with a fee structure that matches your expected behavior to keep your fees manageable. 

You’ll need to read and understand the card policy agreement to decide which card may be best for you. If you still have questions, contact the issuer to help explain the agreement.

Using Credit Cards Wisely

Credit cards can be tricky. Like any tool, when used correctly, you’ll reap the advantages. But it’s common for people to make mistakes when using credit cards.

To maximize the benefits of having a credit card:

• Watch Your Spending Habits. Think of your credit card as a debit card, meaning you don’t want to spend more money than you have in your bank account. Only use credit cards for purchases you can afford to pay off by the end of the month. This approach makes paying off the entire bill each month easier.
• Follow a Budget. Keeping tabs on your budget can be challenging, no matter how you spend your money. But figuring out where cash goes is especially difficult. By making all your purchases with your credit card, you can see exactly how much you’ve spent at the end of the month. Many credit card issuers will classify your purchases by category. You can get an overview of your spending by type when you log into your account. Tracking your spending in one place can help you prepare and adjust your budget. 
• Stay Within Your Limit. Just because you’re given a high credit limit doesn’t mean you should use it all. Carrying a hefty balance can harm your credit and make it difficult to pay down your debt. Restrict the use of your card to only what you can afford. It’s easier to pay the balance every time.
• Pay Balance in Full. Credit cards tend to have high-interest rates relative to other kinds of loans. A single late payment is not much, but it could be a slippery slope leading to debt and low credit scores. Paying bills in full each month helps prevent you from falling into the cycle of endless minimum payments, high-interest accruals, and a whirlpool of debt. Interest on credit cards compounds, so the next month, your interest is based on the new, higher amount.
• Avoid Penalty Fees. You avoid interest charges when you pay off your balance in full each month. If you can’t pay the entire balance, send the minimum amount. Late fees and penalties for missed payments can be expensive. Another way to avoid missing a payment is by setting up autopay. Automating is an easy way to avoid late fees. 

Credit Card Options With The Focus Federal Credit Union

Central to using credit cards responsibly is spending within your means, paying bills on time, paying off your balance monthly, and selecting a credit card that suits your needs. FFCU offers credit card options to fit your financial situation.

And if you need help getting your credit back on track, we have the tools and resources to help. Fiscal guidance programs educate and advise you on making wise financial decisions. Financial counseling can be beneficial for budgeting, savings, debt management, or bankruptcy counseling.

Abigail Cabello

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