What it Means to Use a Credit Card Responsibly

The credit card is the most common form of credit in the United States. There are over 1 billion cards in circulation today, representing several trillion dollars of buying power or “open to buy,” as it’s called in the credit card industry. 

And while the credit card provides an uber-convenient method of making purchases in almost any environment, it’s not hard for cardholders to get themselves into trouble if they make some mistakes. 

That’s why it’s important to practice responsible use of credit cards, and here’s what that means.

Before we head down this road, let’s make sure we get one thing clear: All forms of debt are incurred voluntarily. This includes student loans, mortgages, auto loans, and yes, credit card debt, although you can make a good argument that emergency medical debt isn’t really a choice. 

The voluntary nature of credit cards means we’re responsible for our use, and abuse, of the cards. We can choose to manage them properly or we can choose to manage them irresponsibly.

Credit cards were created with a singular purpose: to provide a payment method that was more convenient than cash or check. Credit cards are issued with a defined amount of buying power or capacity, commonly referred to as the card’s credit limit. The cardholder can buy goods and services in an amount not to exceed that limit.

Of course, just because you can spend all of your credit limit certainly doesn’t mean you should. Our first example of responsible credit card management is not to overextend yourself and spend too much.

Here’s why you don’t want to spend too much on a credit card: The average interest rate on a general use credit card (Visa, Mastercard, Discover, American Express) is in the neighborhood of 18%. That makes borrowing money on a credit card very expensive if you don’t pay it back in full each month. 

In fact, the amount you would pay to service credit card debt is likely more than you’ll pay to service any other form of debt. So, there’s a financial benefit and penalty associated with whether you carry a balance on your credit card, formally referred to as a revolving balance.

The good news is credit card interest is voluntary. You won’t be charged interest if you pay your balance in full each month, and your interest rates become irrelevant. You can’t say the same for any other form of credit, including the much less vilified home, student, or auto loan forms of credit. 

If you don’t pay your balance in full each month, interest begins to accrue, and that will get expensive.  

Do you remember when you applied for your credit cards? You filled out some paperwork or an internet application and checked a few boxes agreeing to certain terms and conditions. 

What you did was agree to the terms defined in your cardholder agreement, one of which was to make sufficient payments on time per your agreement.

Our second example of responsible card management is to never miss payments — ever. This is where cardholders often forget that they have a contractual agreement with their credit card issuers and that their card issuers are banks, not their personal friends. 

Every month that you use your credit cards, you receive a statement online or in the mail that includes your minimum payment requirement and the due date of that payment. That means you must make the contractual minimum payment amount, or more, by the due date. 

If you make a payment that’s less than is contractually due, then you didn’t make a sufficient payment. If you make a full payment after the due date, you didn’t make a timely payment and may be subject to a late fee. 

I can’t tell you how many times I’ve acted as an expert witness in a credit reporting-related lawsuit where a consumer tried to dictate the rules of engagement with their lenders, make payments on their own schedules in amounts they felt were sufficient, and then thought their card issuers should have been happy with what they were getting and when they were getting it. 

Of course, this is not how it works, and consumers should not be surprised when their credit reports start to show a record of this mismanagement, including late payments and past-due balances.

Don’t make the mistake of ignoring the terms of your cardholder agreement. Pay your lenders on time and in the agreed-upon amounts.

If you Google the term, “What’s the right number of credit cards?” you’ll find over 3 billion results. Many of those are articles trying to peg some mythical “correct” number of credit cards that someone else believes you should have. 

I’ll save you the suspense: There is no universal right or wrong number of cards you should have. If you want one card, then one card is fine. If you can properly manage 10 cards, then 10 cards are fine. 

Any specific number of cards that someone suggests is the right number is simply an opinion. Our third example of responsible card management is to never close credit cards just because someone else thinks you have too many.

Whenever people ask me about the right number of cards, I use a pretty simple formula that anyone can apply. Take your average monthly credit card balance (the sum across all of your cards) and divide that number by the sum of your credit limits. 

For example, if your average monthly credit card balance is $2,000 and the sum of your credit limits is $10,000, then you’re, on average, 20% utilized each month. 

If that ratio, which is called your revolving utilization, is more than 10%, then you don’t have enough credit cards. If that sum is at or below 10%, then you have the right number of cards. 

I’m tackling this question from a credit scoring perspective because credit scoring models reward you if you keep your utilization ratio below 10%. I could care less how many cards you have, but I do want you to have good credit scores, and having a large amount of unused credit limits is one way to do so.

When you close card accounts, you lose the value of the credit limit in the revolving utilization ratio. If you don’t reduce your average monthly credit card balance to adjust for the lower total credit limit, your scores will likely go down. That’s why you see so many articles warning you against closing credit card accounts. 

If you’re reading this and thinking, “This is all really simple and obvious. I didn’t need someone to tell me to pay my bill on time and not spend too much.” I couldn’t agree more. Proper credit card management is not an advanced concept. 

The problem is cardholders still overspend and still miss payments. According to Yahoo Money, applications for credit cards have increased by over 26% in 2022 compared with 2021. 

According to Lexington Law, a credit repair law firm, the rate of low-level delinquencies (30-59 days late) increased by 6% in 2021. 

And according to CNBC, credit card balances hit $841 billion in Q1 2022, and analysts suggest we could hit an all-time high. When you add all these things together, you end up with a sharp increase in card accounts, larger balances, and late payments. This means late fees, interest, and negative credit reporting. 

So, despite the simplicity of my advice, there are plenty of people who still ignore it.

Don’t use your card to the point where you can’t pay it in full each month. Don’t use too much of your cards’ credit limits. And don’t close cards just because you think you have too many of them. If you abide by these three behaviors, you’ll be in good shape.