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How to Use a Credit Card: Helpful Tips & Best Practices

Credit cards are convenient tools for making purchases and tracking payments while providing many benefits, such as convenience, rewards, fraud protection, and opportunities to build your credit history and credit score.

 

It’s important to understand general practices for using credit cards responsibly and making the most of your credit card purchases.

July 24, 2020 in Learn

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Credit card basics

Review these credit card basics before applying for a new credit card.

Applying for a card

You can apply for a credit card online. When applying for a credit card, you will need to provide at a minimum:

 

●     your full legal name,

●     current address and

●     employment and income information.

 

Your approval and credit limit will depend on your credit history and credit rating. If you have a good credit score and history of on-time payments, for example, you may be approved for a higher credit limit.

 

There are different types of credit cards you might apply for, such as cash back credit cards and rewards cards. Consider your spending habits when deciding which credit card to apply for so you can maximize your credit card benefits. It’s also important to look at annual fees and interest rates before signing up so you’re not hit with unexpected payments.

How APR Works

Annual percentage rates (APR) refers to the annual rate of interest that would be charged over a year. Interest charges are billed when purchases aren’t paid off in full and on time. The credit card issuer will set your APR based on multiple factors, including the type of credit card you’re applying for and the number of Missed Payments. While an APR is a yearly interest rate on your credit card, it is calculated based on your average daily balance. The average daily balance is multiplied by the daily interest rate (which is the APR divided by 365 or 366 if it’s a leap year), then multiplied by the number of days in the statement period to determine the interest charged to you. Interest calculation methodology can vary for different lenders.

How to budget for credit card spending

Building a budget for your credit card spending can help you manage your debt and earn rewards. Start by documenting mandatory monthly payments such as rent, car payments, utilities and groceries. Make sure your monthly income covers these payments. A portion of your leftover income can be saved and another portion can be used to pay off remaining credit card purchases. Avoid overspending and accruing interest by only buying what you can afford to pay in cash; this will allow you to pay off your credit card each month and earn rewards on purchases you were going to make anyway.

How rewards programs work

Credit card rewards programs provide you with redeemable points or cash back each time you use the card to make a purchase. Most credit card reward programs can earn you points for every qualified purchase made with the card, where some cards include a higher rate for earning points when you spend within a specific category.

 

Once you have earned your reward points, you can redeem them within the cards’ rewards program for merchandise, you can transfer your points to a partner loyalty program, or you can cash them in, depending on the redemption options available within the rewards program.

Advantages of credit cards

There are many benefits of using credit cards. Credit cards can help improve your financial health, protect your purchases, and provide rewards that are relevant to your particular spending habits.

Build credit

Maintaining a credit card with on-time payments and responsible credit usage can help you build your credit history and credit score. Banks and lenders check your credit score when deciding whether or not to provide you with a loan, such as a car or mortgage loan. A high credit score and good credit standing will attract more loan options and favorable terms, such as lower interest rates.

Protect purchases

Many credit cards provide fraud alerts for suspicious transactions. Credit cards may also offer zero liability guarantees (such as our Fraud Protection Guarantee).

Earn rewards and points

Reward credit cards offer benefits such as cash back and redeemable points each time you spend. The American Express Cobalt™ Card, for example, lets you earn points for every purchase.

Using your credit card: best practices

Diversify your credit mix

Opening a new credit card can help you diversify your credit mix. Credit mix is an important factor which allows lenders to understand how well you have managed credit in the past. Responsibly maintaining a diverse range of accounts, such as mortgage loans, car loans, and credit cards, can positively impact your credit score.

Pay bills on time and in full

Paying bills on time and in full can keep your balance consistently low and help you avoid accruing interest payments. Making payments on time can also positively impact your credit score.

 

Consider setting up automatic payments or calendar notifications to stay on track with credit card payments. 

Keep your credit utilization ratio low

Your credit utilization ratio is the ratio between your credit balance and credit limit. For example, if your balance is $1,000 and your credit limit is $5,000, your credit utilization ratio is 20%. By keeping your credit utilization ratio low, you can ensure that your balance remains manageable and prove that you can responsibly maintain your credit card.

Find rewards that match your spending goals

Reward credit cards can help you earn points, miles, and cash back for each purchase you make. Choose the credit card and reward options that best fit your spending habits so you can earn rewards for regular purchases, such as groceries. It’s also important to make purchases within your means and not just for the sake of earning rewards, as annual fees and interest rates can add up.

Review your statement regularly

Review your credit card statement regularly to track your expenses and ensure you’re staying in budget. You can also check your statement to correct any errors and address any suspicious charges.

How to choose the best credit card for you

To choose the best credit card for you, first identify your financial needs and spending habits. If you’re a food lover, for instance, a card that rewards you for spending on take-out or delivery meals can transform your regular food bills to points earners.

 

The Cobalt Card lets you earn 5 points for every $1 you spend at eligible restaurants and food delivery services in Canada1, with various ways to redeem rewards.

 

On the other hand, if you want to obtain maximum rewards on daily shopping purchases, you might want to get a cash back credit card, such as the SimplyCash™ Preferred Card from American Express.

 

Explore all American Express Credit Cards to find the best option that suits your needs and lifestyle.

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