Credit card usage has the potential to be a positive tool for credit building or a method of amassing devastating debt. By understanding how to use a credit card appropriately, you avoid serious problems with your credit report, credit score and bank balance.

Use in Moderation

A credit card works effectively as a financial tool when you need it, such as when reserving a hotel room or making an online purchase. When you use your credit card regularly and within your budget, you show responsible and prudent spending that fits your finances. The credit card issuer reports your pattern of responsible behavior to the credit bureaus, which has a positive impact on your credit score.

Paying Balances in Full

For optimal credit benefit and to fit the profile of appropriate credit card use, pay your credit card balance in full each month. Paying a balance in full demonstrates that you are spending within your budget because you can afford the payment. Paying down your balance to zero also avoids costly interest charges that accrue on unpaid balances.

Splurging Dangers

Credit cards can seem like “magic money” if you’re not careful. With that plastic in your wallet, suddenly you have the ability to hit the electronics store for a spending spree. Using a credit card to buy things you want immediately without saving for them can be a dangerous and inappropriate way to manage your finances. When the credit card bill comes due at the end of the billing period, it’s likely that you won’t have the funds to pay the balance in full, which sets in motion the cycle of interest charges. Adding interest charges to the original cost of the item pushes up the price significantly, especially if you pay these interest charges for months.

Lack of Financial Management

Making a late payment usually results in a late fee that is tacked to your account, which is an expensive lesson in punctuality. A late payment can also serve as a red flag to creditors that you aren’t managing your finances responsibly or effectively. Credit card issuers have different policies regarding the when and how of reporting late payments to the credit bureaus. Some wait to report late payments for 30 days and others report late payments more quickly. The bottom line is that making late payments on your credit card accounts is risky because of the potential for negative information reaching your credit report. Negative information stays on a credit report for seven years.