How NOT to Use a Credit Card
I’ll be the first to admit it: I love my credit cards!
Yes, I used the word “love” and “credit” in the same sentence and meant it. I also said credit cards. As in, plural.
I maintain four different cards, each one with a different purpose. And I love them because they allow me to maintain a great credit score, safely make purchases around the world, and earn reward points for the spending I already budget for.
They also help me get through scary emergency situations. Just this week, my cat got sick, and we had to take him to the emergency animal hospital. He’s doing well now, but the total bill for his procedure (and subsequent surgery): nearly $4,000.
I was extremely emotional at the moment and not thinking about the exact balance of my checking or savings accounts. I had to decide between putting my kitty to sleep or paying for the surgery.
I pulled out my credit card with the $15,000 limit and didn’t have to think twice.
Afterward, I needed to go back and figure out how to pay off the balance. That’s where my emergency fund came into play.
(Which, by the way, is a lesson for another day: always keep an emergency fund for these kinds of scenarios!)
I transferred money from my emergency account to my checking. Then, I paid off the balance of my credit card in full.
I deeply appreciate all the flexibility, security, and benefits of using credit cards. But there’s no doubt about it: there are also ways you shouldn’t use a credit card.
Bad and irresponsible behavior with your plastic can land you in a world of financial trouble. Curious as to what that means? Take a look at the following 5 actions that illustrate how not to use a credit card.
1. Using Your Card Like It’s Free Money
Your credit card does not give you access to free money! It can feel that way since you can charge up to whatever the credit limit on your card is to buy now and pay later.
But keep in mind, anything you charge can and will be used against you when your statement arrives in the mail.
This might be the most obvious way not to use a credit card, but people still charge more than they can afford on their cards all the time. Using your card this way is the fast lane to carrying a balance you can’t pay off -- and then paying interest on top of the balance.
Treat your credit card like a debit card or cash. If you don’t have enough cash to pay for something, you can’t buy it with whatever cash you have on hand.
The same should be true for your card: if you don’t have enough cash to pay off the balance before interest hits, you shouldn’t make a purchase with your plastic.
On a similar note, don’t use your card for cash advances. It’s not an ATM, and you’ll pay dearly for getting cash from your credit card. These transactions usually come with fees and interest rates that may compound daily.
2. Making Only the Minimum Payments
You may think you know better than to let your balance just sit there. So you make the minimum payment each month instead.
You’re making progress, right?
In reality, probably not. Your balance will grow faster than you repay it because the minimum is usually only a small percentage of your total balance. Meanwhile, the balance you still owe continues to accumulate interest charges.
Only paying the bare minimum is how credit card debt gets insanely out of control. This is still not how you should use your card.
3. Avoiding Your Card Entirely
Struggling to manage your credit and not fall into #1 up there? You may be tempted to go to extremes to avoid using your card.
Some people suggest freezing your card in a block of ice so you can’t get to it easily. Others advocate for shredding or cutting up your card and tossing the scraps into the trash.
But there are some potential problems if you try to “use” your credit card in this way:
- You may end up needing that card in an emergency.
- You won’t actively build a positive payment history for the sake of your credit score if you forego credit altogether.
- Your account may automatically close after a set period, which could cause inconvenience for you and trouble for your credit score.
Using your card for small purchases here and there each month -- and paying it off -- helps maintain a good credit score and an active account. You’ll also have a backup method of payment should you find yourself in an emergency situation with less cash than you need to cover it.
Plus, you’ll also avoid the embarrassing situation of trying to pay for your items at Target and having your REDcard declined. Yup, it happened to me -- and I was mortified.
Thankfully, I had another card that I pulled out and paid with. But I pride myself on managing my finances well. How could this happen?! And in front of a line full of curious patrons wondering how many pairs of shoes some dumb 20-something must have bought to max out her Target card, no less!
(Okay, I made that last part up. Who knows what the shoppers behind me thought when my credit card was declined. The point is, it’s embarrassing!)
It turns out; Target closed the account because it had been inactive for three years. I can’t blame them for that, and it was an important lesson learned for me. Don’t just ditch a card and think your lack of use means the end of it.
4. Keeping Your Card in Your Wallet in Potentially Risky Situations
Credit cards come with a lot of consumer protections. They are inherently safer for you to use because there’s no direct connection between your card and your cash.
If your information is lost or stolen and you use a debit card, thieves have direct access to your checking account. They can drain the money and leave you with no cash before you know what happened.
And while most banks will work with victims of fraud, there’s no doubt that the period between losing your cash and getting the situation worked out with your bank causes stress and financial problems.
Who wants to deal with seeing all their cash suddenly gone one day? It doesn’t matter how many options for recourse you have. That’s still days or possibly weeks that you can deal with the consequences as you work through the dispute and fraud reporting process.
With a credit card, fraudulent activity can still cause a headache. You need to dispute the charge with the credit card company. But the charge is just something that shows up on your account -- it’s not money gone from your accounts until the statement is finalized.
For this reason, I always use my credit card when I buy gas at the pump or any other place where it’s easy to install card skimmers that can steal your information. I also use my credit card to pay at restaurants and anywhere else someone can take my card away from me and out of site.
No, I don’t think the world is full of bad people out to get me. But I do think using a credit card is a simple and easy precaution that keeps my cash safe should my information ever be stolen.
5. Using Your Card for Every Purchase You Make
You don’t carry balances on your card, and you only charge what you can afford to repay each month. No interest charges or overspending for you!
This is a good start, but you could still be misusing your credit card. Are you using up to your credit limit each month before you repay that balance in full?
If so, your credit score could suffer because your credit utilization rate is too high. This ratio makes up 30% of the calculation that determines your credit score, so it’s an important number to watch.
This ratio is the relationship between your credit limit (or how much credit you have available) and your statement balance (or how much credit you used). Using your card for every single purchase throughout the month and running up the balance hurts your credit score in the long run.
Try to keep your credit utilization ratio at 30% or below. It’s okay if you go over from time to time. It’s also okay to charge more than 30% to your card, as long as you pay off that balance before your statement is due.
Know How to Use Your Plastic -- and How Not to Use a Credit Card
While I believe credit is a useful tool that everyone can use for their benefits, the key is in the responsible use of your card. That means avoiding these five examples of how not to use a credit card.
There are a lot of smart ways to use credit cards to build your credit, improve your financial situation, and get rewarded for the purchases you need to make anyway (like gas or groceries).
Focus on taking positive actions with your credit card, like only charging what you can afford to repay (and what you planned to purchase) and paying off your balance on time and in full. And learn what makes up your credit score, so you can manage your cards wisely to keep your credit in great shape.