Believe it or not, there is a right way to use a credit card and it might not be exactly what you think it is.
TL:DR? I made a TikTok video of this article that you can watch!
Credit cards....they're a blessing but also a curse. How they're sold to us is a way to buy what we want now, but pay it off later (very similar to the Buy Now, Pay Later apps now out in the market). Plus, we can qualify for points/rewards that we can redeem for cash, gift cards and more. What we're not told is how the absorbent interest rates and carrying a balance can hurt our wealth and our credit scores in the future.
First, the interest rates for credit cards are deceiving. They are presented to you as the annual percentage yield (APY) - so naturally you think, you are being charged annually for the balance you carry. Wrong. You're interest is calculated daily. The APY is divided by 365 to get the Daily Percentage Rate (DPR). Whatever balance you have that day will have the DPR applied to it. What happens the next day? The new balance, which includes the DPR from the day before, now has the DPR applied to it. The more you keep a balance on your credit card, the more the interest compounds and turns your once low balance into unmanageable debt.
Second, carrying a balance can potentially impact your credit score through something called a credit utilization ratio. Credit utilization ratio is calculated by taking your current credit card balance and dividing it by your available credit limit. By continuing to keep a balance, your credit utilization ratio could continue increasing, which is a red flag to the credit bureaus. Typically, staying under a 30% credit utilization ratio is the sweet spot. Anything above 50% is usually a big no-no. Why? It shows that you're responsible by not having a high level of outstanding debt. Read more about how to improve your credit utilization ratio in a separate blog post.
So after all that, what is the right way to use a credit card? Put all of your expenses on your credit card, pay it off each month (or more than once a month in order to stay below 30% credit utilization ratio) and enjoy the perks! Earn those miles or points and get cash/statement credit back to continue paying down your bills!
For more credit card tips & tricks, visit my TikTok page or watch why you should pay off your credit card each month.