5 Steps to Building Credit and Staying Out of Debt With Your Credit Card

A man uses a credit card to make an online purchase.
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Your first credit card just arrived in the mail.

Congratulations! Or my condolences. It all depends on what you do next.

Credit cards can get a bad rep — and deservedly so if you consider that by the end of 2018, Americans had $870 billion in credit card debt, according to the Federal Reserve — but there are also positive aspects of credit cards, including building your credit history — which can help raise your credit score — and earning rewards.

But now that the plastic is yours, how can you avoid the pitfalls of credit cards and enjoy the benefits? You’ve probably already heard about paying your card on time and paying the full balance, but we have a beginner’s guide to using a credit card to build your credit without spiraling into debt.

Oh, and if you’re looking for the basics about what exactly to do with a card — like how to make a purchase in a store or online — we can help with that, too.

Open that envelope and let’s get started.

How to Use a Credit Card

Don’t let your newbie status lead you to believe that everyone else must understand how credit cards work.

“There are myths out there that you have to carry a balance, that you have to make major purchases — absolutely not,” said Todd Christensen, an Accredited Financial Counselor and education manager with MoneyFit.org. “People who suggest that are doing a disservice to the majority of card holders.”

If you’re not sure how credit cards work, you can learn the fundamentals at The Penny Hoarder Academy’s Credit Cards 101.

Once you have the basics, here are five tips for using your credit card responsibly so you don’t get into debt but do build a credit history.

1. Put One Purchase on Your Card Each Month

A server takes a credit card from a customer.
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Rather than rushing to the store or trying out the latest restaurant, pretend you don’t have the card — at least for the first few months (or until you trust yourself). But leaving your card to gather dust in a desk drawer doesn’t help build your credit history.

As an alternative, set up your card for paying a bill.

“Put one purchase on it a month that is going to be the same amount every month and not large — like a Netflix, a cell phone bill, maybe a utility bill that’s on level pay,” Christensen said. “Pay it off every month — you only need one purchase a month and you’re building credit.”

Don’t want to commit to a subscription? Think even smaller.

“You can buy a pack of gum, pay it off, and that’s all the activity you have on your card,” Christensen said. “You’re still building your credit.”

2. Don’t Carry Your Credit Card With You

The power of plastic can lull you into believing you can afford something you can’t. After all, if there’s space on the card, that means you can afford it, right?

But unless you know exactly how you can cover the expense with cash, the credit card bill can creep up before you know it. Credit card creep is particularly dangerous when you’re out with friends or family and thinking more about what a good time you’re having — or how appetizing that pricy entree sounds — rather than where you stand financially.

“It’s really easy to pull out a credit card when you’re out for lunch and you say, ‘Oh, I’ll grab it,’ and then you start overspending,” Christensen said. “Don’t carry it with you into any kind of consumer situation — no store, no restaurants.”

3. Don’t Add Your Credit Card Number to Online Accounts

Having a credit card allows you the freedom to make online purchases. And although shopping in your pajamas may be appealing, Christensen advised that you not store your credit card information on internet shopping sites or apps.

Yes, it is convenient not having to figure out where you left your purse or wallet every time you want to make a purchase on Amazon. But that lack of convenience can also protect you from making an unfortunate impulse purchase in the middle of the night.

4. Pay as You Go

If you went with a store credit card for your first foray into plastic, you probably did it to enjoy some discounts at your favorite store, right?

But store cards typically come with a lower credit limit, and using too much of it — even if you aren’t maxing it out and paying off the balance at the end of the month — can harm your credit score because you’re using a greater percentage of your credit.

Rather than waiting until the bill arrives to pay the balance, Christensen suggested you bring your debit card, checkbook or cash along to the store and pay off what you charge immediately.

“Before you leave the store, go to the customer service desk and pay it off every time,” he said.

You can follow a similar plan if you have a bank-issued card by going online to pay off each purchase as you make it, then treating it as you would a debit purchase. That way, you’ll always know where you stand with your card and your bank balance.

5. Pay Off Your Credit Card Each Month

A person with credit cards uses a calculator.
Carmen Mandato/The Penny Hoarder

Wait a second, you say, we covered this one in the intro.

Sorry, but this one really can’t be emphasized enough.

There is no justification for — and no benefit to — carrying a balance, according to Christensen. People sometimes hear advice about other types of debt — like mortgages, for instance — and misunderstand financial advisers who suggest they should invest the money rather than paying off a debt.

But mortgage interest rates are just below 4%, while credit cards have an average APR of 16.91%, according to the latest Federal Reserve Consumer Credit Report.

You’re better off paying your balance each month and building a solid credit history.

How to Use a Credit Card to Make a Purchase

Now that you know how to use a credit card responsibly, you may be thinking, “Great, but how do I actually use the card in a store or online?”

First, sign your card as soon as you receive it. It’s mostly a technicality, but many major issuers still make you sign the card on the back as an added measure of security. You will also need to contact the issuer to activate the card; typically, there’s a sticker on the card with a phone number or website to direct you.

When you’re ready to buy at most stores, you’ll insert your card into the electronic credit card reader at the checkout. If you have a chip card (identifiable by a metallic square chip about the size of a pencil eraser), you’ll “dip” it — or slide it into the terminal slot. If you have non-chip card, you’ll swipe it through a slot along the side of the machine.

A chip card is like any other credit card except that it has a microchip embedded in it. The microchip encrypts your data, making it harder for thieves to steal your info or create a counterfeit card.

Some retailers now offer tap card readers for “contactless” payments — the checkout clerk should be able to tell you how to make your payment if you have questions at the register.

However the store captures your information, you’ll need to sign either a paper or electronic receipt to complete your purchase.

Buying online requires you to enter your credit card number, card expiration date and security code at the point of checkout. Here’s how to identify each:

  1. Credit card number: The 16- to 19-digit number on the front of your card.

  2. Expiration date: Typically listed on the front of your card in month/year format.

  3. Security code: Usually a three-digit number on the back of your card, to the right of the signature strip.

You’ll also need to add the address of your credit card mailing address to complete the purchase.

Using a credit card can make life more convenient and help to prove your credit worthiness for bigger purchases like a car or home. So long as you do it responsibly, you deserve a lot of credit for taking this next step in your financial journey (pun totally intended).

Tiffany Wendeln Connors is a staff writer at The Penny Hoarder. Data Journalist Alex Mahadevan contributed to this article.