A credit card can be a powerful financial tool when it comes to building your credit history and improving your credit score. Plus, many credit cards provide rewards and perks, from cash back to points that can be redeemed for travel.

On the other hand, credit cards can also be a source of financial stress if you start accruing late fees and interest charges. Let’s dive into the fundamentals of responsible credit card ownership, from how to use a credit card wisely to understanding hidden fees.

How does a credit card work?

Issued by banks, credit unions, and various other financial institutions, credit cards give you a line of credit that you can use to make purchases and payments. The credit card issuer will give you a credit limit, which is the maximum amount of funds that you can borrow based on your credit history and income.

The amount of credit you’ve used compared to your total credit limit is called the credit utilization ratio. Financial experts suggest keeping your credit utilization ratio below 30 percent.

For example, if your credit limit is $10,000 and you have a balance of $5,000, your credit utilization ratio would be 50 percent. A lower credit utilization ratio may help improve your credit score because it shows lenders that you are a responsible borrower.

Each time you buy goods or services with your credit card, you are effectively borrowing money from the lender. You must eventually repay that debt, in addition to any interest or fees you may have accrued. In most cases, you’ll need to pay back the borrowed funds within a certain period of time, usually 21 days after the billing cycle’s closing date.

What is the average APR for a credit card?

The annual percentage rate (APR) is the annual interest rate you’ll pay on your credit card balance. In general, the higher your credit score, the lower your APR will be since credit card issuers consider borrowers with high credit scores to be less risky.

It’s generally wise to pay off the entire statement balance every month to avoid accumulating interest charges. Making only the minimum payment can lead to a downward spiral of debt over time, especially since the average APR on many credit cards ranges between 16.2 percent and 21.3 percent.

How to use a credit card without accruing debt

Credit card debt is easy to rack up and is also one of the hardest debts to pay off.

Here are a few tips on how to responsibly manage revolving credit:

  • Spend only what you can afford to pay back: It’s easy to get caught up in the moment and spend more than you intended. However, keeping your credit card bill small is a great way to avoid accumulating debt.
  • Create a budget: Establishing a spending plan may help you stay on track with your credit card use. It can help you identify areas where you may be overspending and make adjustments as necessary.
  • Pay your statement in full on time every month: Whenever possible, it’s wise to make the full monthly payment instead of just paying the minimum amount. This can help you save money that might otherwise go toward interest charges, late fees, and even services to fix your credit score.
  • Use a low-interest credit card: If you must carry a balance from month to month, minimize the amount of interest you’re paying on it. Aim for a credit card with a relatively low APR.
  • Keep your credit utilization ratio low: A high balance relative to your credit limit can have negative effects on your credit score. As a general rule, try to keep your credit utilization ratio below 30 percent.

Additionally, be mindful of cash advance fees. This type of transaction allows you to withdraw cash from your credit line by going to an ATM or financial institution. Interest will start to accrue as soon as you make the transaction. Credit companies typically charge a fee for cash advances, and interest rates for these transactions are typically higher than the normal APR.

What is the difference between a credit card and a debit card?

While a credit card and debit card may look the same, there are a few key differences.

With a credit card, you effectively borrow money from a bank or other lender and then pay it back each month. The debt can also accrue interest if you don’t make the monthly payments.

In contrast, a debit card is linked directly to your bank account, which means the money you spend is already yours. When using a debit card, transactions may be declined if you try spending more than you have.

One of the major benefits of using a credit card is that it can help you build good credit. In addition, most credit card companies offer protection against fraud if your card is lost or stolen.

Conversely, depending on when you report a lost or stolen debit card, there could be limited recourse since the money is taken directly out of your bank account. Debit cards also typically don’t have an impact on your credit score.

What are the different types of credit cards?

A credit card may come with a variety of features. Some might offer rewards, while others may offer low interest rates.

Here are the most common types of credit cards:

  • Standard credit cards: Ideal first credit cards for many consumers, this is one of the most common types of credit cards. They usually have a modest interest rate and no annual fee.
  • Secured credit cards: Designed for people with bad credit or no credit history, secured cards require a security deposit. You’d then use this deposit as your credit limit.
  • Rewards credit cards: Offering cash back, points, or travel miles for every dollar spent, rewards credit cards may also give extra rewards for specific categories of spending, such as travel or dining. Rewards can be redeemed for travel, cash, or gift cards. Rewards credit cards may require you to pay an annual fee.
  • Balance transfer credit cards: With a low or zero-percent introductory interest rate, balance transfer credit cards allow you to move your balance from another card that has a high interest rate.
  • Business credit cards: Intended for business expenses, these cards often come with an annual fee and higher credit limits than consumer cards. They also may feature rewards and perks, such as travel insurance or extended warranty protection.

Thoroughly read the credit card terms and conditions of any product before applying. Pay attention to terms like grace periods, balance transfer rules, and redemption requirements for any rewards programs.

Make sure you understand all the fees associated with the card prior to signing up. After all, annual fees, foreign transaction fees, and late payment fees can add up quickly.

How can a credit card improve your credit score?

Essentially, a credit score is a number that represents your creditworthiness. Someone with a high credit score may qualify for a loan or mortgage with more favorable terms, such as a lower interest rate, than someone with a lower credit score.

When cardholders use their credit cards, the issuer reports their activity and payment history to the major credit bureaus: Experian, Equifax, and TransUnion. This activity then contributes to the cardholders’ credit scores over time.

Having a mix of credit types is another way to show that you can handle different types of debt responsibly. This means having a variety of different types of credit accounts, such as credit cards, student loans, and auto loans. If you possess only one kind of credit account, it can be difficult to show lenders that you’re a responsible borrower.

What should I do if I lost my credit card?

If you lose your credit card, the first thing you should do is contact your credit card company. The credit card issuer may want to cancel your card and issue you a new one with an updated account number to help you avoid fraudulent charges.

Keep in mind that if you do not report the lost card in a timely manner, you could be responsible for up to $50 in unauthorized charges. While you await your replacement card, check your credit card balance regularly and report any suspicious activity immediately.

The bottom line on how to responsibly use a credit card

Using a credit card responsibly is one of the keys to building credit and avoiding credit card debt. However, once you get into the practice of monitoring your credit score, practicing good financial habits, and making your monthly payments, using a credit card can become much less intimidating.

Whether you’re new to credit cards or just want to learn more about responsible credit spending, Vital Card is here to help. Vital offers generous cash-back rewards and advanced features that monitor and track spending to help you take control of your personal finances and build credit.

Explore Vital today.


30% Credit Utilization Rule: Truth or Myth? | NerdWallet

Statement Closing Date vs. Payment Due Date: What’s the Difference? | The Balance Money

How to Get a Lower APR on Your Credit Card | NerdWallet

Average Credit Card Interest Rates for 2023: Current Rates by Category | WalletHub

What Is a Balance Transfer, and Should I Do One? | NerdWallet

What Are the Three Credit Bureaus? | NerdWallet

What is a Credit Mix? – Benefits of Credit Diversity | Equifax®

Lost or Stolen Credit, ATM, and Debit Cards | Consumer Advice

Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.