Intro

Some people use credit cards a ton, and others avoid it like the plague. There’s a ton of conflicting advice in personal finance circles, from people like Dave Ramsey who advise to never use credit cards, others like The Money Guy recommends using credit cards responsibly, and then there’s the churning community who tend to use credit cards a ton.

This post will go over how credit cards work, commmon benefits, and will conclude with general advice on what “use credit cards responsibly” means.

Statement cycles, grace period, and interest

Bank accounts usually operate on a monchly schedule, where you’ll earn interest on the average balance throughout the month. Credit cards operate on a statement cycle.

Most credit cards use a month-long statement cycle, so your statements will close on about the same day each month, whereas some use a fixed number of days in the statement, so your statement cycle can “drift” month to month since months aren’t the same length. The larger issuers tend to use a month duration, so your statement will usually close on the same day each month. Credit card payments are usually due a fixed number of days after the statement closes.

A statement cycle contains all of the transactions that happened during that time. The sum of all of these transactions is your statement balance, and after your statement cycle closes, your total balance (the number reported on the website) will include any transactions you made after the statement cycle closes.

Grace period

The time from the purchase to the due date after the next statement close is called the “grace period,” which is the period where interest does not accrue. Here’s a simple example:

• statement opens on the 10th and closes on the 9th of the following month
• payment is due 16 days after the statement close, so the 25th of the following month

Anything you buy from the 10th to 9th of the next month will be part of the same statement, and those purchases will not accrue any interest until after the payment due date, the 25th of the next month. So if you buy something on the 10th, you’ll have 45 days to pay that back before that purchase starts accruing interest.

Minimum payment

Credit card companies require making at least the minimum payment every month in order to be on time. Usually this is the larger of a fixed amount (e.g. $50) and a percentage of the amount owed on the card (e.g. 1% + interest). If you make at least the minimum payment each month, your card will report to the credit bureaus that you paid your bill on time, which will help your credit score.

However, if you pay less than your statement balance, the remainder will start to accrue interest daily, and that interest will be added to the total for the next month’s minimum payment.

Interest calculation

Let’s say you have a credit card with these figures:

• $50 minimum payment, or 1% of total balance + interest accrued, whichever is greater
• 20% interest rate
• $10k balance

Let’s say you make the minimum payment. In this case, 1% of $10k is $100, so your minimum payment would be $100. Since no interest has accrued yet, all $100 of that payment would go toward the balance, and you’d start accruing interest immediately. The first day after your payment due date, you would accrue:

$9,900 * (20% / 365) = $5.42

The next day we add that interest to calculate the next day’s interest, which is:

$9,905.42 * (20% / 365) = $5.43

And so on. If there are 30 days in the month, that’s going to be $165.70 in interest added on to your balance, which is greater than your initial 1% minimum payment. Your next month’s minimum payment will be even higher because you’ll be required to pay the interest plus that 1% toward the debt, so the new payment will be ~$265.70.

Different credit cards have different rules for the minimum payment, but in most areas, credit card companies are required to have the minimum be high enough that if you stop making any more purchases, you’ll eventually pay off the debt by making that minimum payment.

Avoiding interest

As long as you pay your complete statement balance by the due date every month, you will never pay any interest.

Most credit card companies offer autopay that lets you choose between the minimum payment, your statement balance, and your total balance. The total balance includes transactions in the next statement cycle, and you do not need to pay those until the next statement closes. Setting autopay to pay the statement balance is sufficient to avoid paying interest indefinitely, provided you always have enough money in the account used for autopay.

Common benefits/card features

Foreign transaction fees

Both debit and credit cards charge a fee for making purchases outside of your economic zone. In the US, that means any other country, whereas in Europe, purchases within the EU probably don’t incur a foreign transaction fee.

Most travel cards have no foreign transaction fee, whereas most no-annual fee cards do charge that foreign transaction fee.

Just note that this depends on where the payment was processed, not where the purchaser is, so purchasing from some websites can incur a foreign transaction fee (i.e. I get charged one for purchases at Fanatical.com, despite prices being listed in USD).

These fees are usually a separate line item in your statement, so you can check if a fee was charged.

Extended warranty

Many cards will offer to extend the manufacturer’s warranty if you make the purchase with the credit card. For example, the Costco Visa credit card extends any warranty by 1 year, so if the device within a year after the manufacturer’s warranty expires, you can submit a claim and the credit card company will reimburse you for the cost of the purchase according to their terms.

Rental insurance

If you book a rental car with the credit card, the credit card can serve as auto insurance, meaning you can avoid getting the insurance through the rental company. This benefit seems to be disappearing, and the terms can be a bit nuanced, so definitely read up on the details if you are considering relying on your credit card’s rental insurance.

Price protection

If the price of a product drops within some window of time after purchase, your credit card company may reimburse you the difference. They usually require you to go through the merchant first if the merchant also offers similar protection.

Fraud protection

All credit card companies offer robust fraud protection where you are not liable for any unauthorized purchases. Some fraud department can be more difficult to work with than others, but in general, credit card fraud departments resolve cases faster than checking/savings accounts.

Impact on credit score

This certainly can vary by country and perhaps credit bureau, but in general, only the following impact your credit score:

• on-time, late, and missed payments
• age of accounts
• number of accounts (more is better)
• percentage of credit limit used

Whether you pay interest does not impact your credit score in any way.

Getting a new credit card will hurt in two ways:

• adds an inquiry to your credit; hit is small until you have multiple (i.e. >2 and you’ll get bigger hits)
• adds a new, young account, which reduces the average age of your accounts

Those impacts usually go away in 6-24 months, depending on the rest of your credit profile.

General advice

Assuming you’re responsible, in rough order of importance:

• never spend more than you have available in your bank account (i.e. treat it like a debit card)
• pay statement balance on time every month
• keep your oldest card open
• have at least two credit cards
• increase credit limit until your regular spending is a small percent of total limit

I shoot for keeping my credit utilization under 30% for any individual card, and under 10% across all cards. This seems to

If you have a history of being irresponsible with credit, or you think you may misuse it, it’s not worth getting a credit card. You can instead use a secured card, or perhaps a charge card, since both will prevent your from getting into trouble with carrying a balance, while still reporting to the credit bureaus.

Conclusion

Credit cards can be an incredibly useful tool, provided you’re responsible with them. Read up on the benefits for cards you have, and consider choosing new cards based on benefits you want and need.