Understanding and Using Credit Cards

A credit card can offer flexibility in how you fund your life: make purchases with added security (most provide zero liability against fraudulent charges), reserve a hotel room without freezing funds in your checking account, you may even be able to earn money back or points toward future purchases. It's important to understand that your credit card can be an effective financial tool without accumulating unnecessary debt.

Understand the Terms and Conditions

To have access to a credit card you must agree to certain terms and conditions; it is vital that you understand these terms so that you don't find yourself drowning in fees or suffering a drop in your credit score.

• Fees:
  Fees are disclosed in your credit card agreement. These may include annual fees, balance transfer fees, over-the-limit fees, as well as fees on late payments, cash advances, and foreign transactions. Knowing what you may be charged can help you minimize or avoid paying fees altogether. 
  
  
• Interest:
  Interest is the cost of borrowing money and is calculated as a percentage on your outstanding balance. The interest rate is typically stated as an annual percentage rate (APR) and will vary by card. When shopping for a new card, compare APRs to get the best rate. It is also important to note that the credit card company may have different APRs for different transactions such as purchases, cash advances, and balance transfers. Knowing this can help you avoid making costly mistakes. 
  
  
• Billing Cycle and Statement: 
  A billing cycle is the period of time in which account transactions are tracked. At the end of the billing cycle, this activity is summarized in your credit card statement, along with fees, interest charges, and any previous balance you carried. Your statement will also include the minimum amount due and its due date. You must pay at least the minimum on time to maintain a good payment history as part of your credit score. 
  
  
• Grace Period: 
  At the end of the billing cycle, the interest is calculated on the average daily balance that you carry. However, most credit cards offer a grace period between the end of the cycle and the due date (typically 21 days), at which time you don't have to pay interest. If you pay your entire statement balance by the due date the grace period will be renewed for the next cycle. You can avoid paying high credit card interest by continuing the sequence of paying off your balance in full, by the due date, and renewing your grace period for each new billing cycle. Review your credit card agreement closely, often the grace period does not apply to cash advances or balance transfers.

Establish Healthy Financial Habits

With good financial habits in place, you can minimize the effects of accumulating debt on your credit cards.

• Live within your means:
  Think of your credit card as cash. If you don't have the money to pay it off by the due date, then don't use your credit card. It can be more rewarding to save up for a purchase than feel the weight of credit card debt.
  
  
• Establish an emergency fund:
  When an unexpected bill arrives, in a pinch it is easy to grab the credit card to make the payment. In the short term it can relieve the stress of the situation. But, in the long term it can create a financial burden. Having an emergency fund in place can offer you peace of mind and prevent you from taking on unnecessary debt. 
  
  
• Control your spending: 
  Easily review your purchases, payments, and any refunds through an online account with your credit card issuer. Tracking your money can help you stay on top of your finances so that you don't spend more than you have.
  
  
• Be vigilant: 
  Many credit cards allow you to set up alerts for each time your card is used. If you notice a charge that you did not make, you can act quickly to report the fraudulent charge and prevent access to your line of credit. 

Knowing what you agree to when opening a credit card, and establishing good financial habits, will allow you to enjoy the benefits of a credit card without the burden of debt. Explore "Using Credit Cards" (a collection of calculators, articles, and activities) to learn more about choosing the right card, how to pay off credit card debt, and guidance on how to use credit.

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(July 2025)