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When most people hear the word credit card the first thing that pops into their head is “debt.” More specifically, they think credit cards cause debt. However, correlation does not mean causation. Because you know somebody that has gone into credit card debt doesn’t mean the card itself was the problem. It’s more likely that the person’s already bad spending habits were enabled and boosted by a credit card or they fell on hard times. Semantics aside, in this post I’ll break down why you want to ditch the debit card for a credit card, how to get started, and how credit cards can work in your favor.

So what exactly is a credit card?

To better understand credit cards let’s first break down what credit is and how your credit score is generated.

Consumer credit, at its fundamental level, is money an issuer makes available to the individual without immediate payment. This can take the form of a loan, mortgage, line of credit, or credit card. In the case of a credit card, it’s a revolving account meaning that the outstanding balance doesn’t have to be paid in full every month. This is when the Annual Percentage Rate (APR) comes into play. The interest you pay on balances unpaid at the end of every month can range from 10-25% depending on your credit score. This rate is spread over 12 months so assuming a rate of 15% you’d pay 1.25% in interest every month on your outstanding balance.

However, no matter how low your APR is, it’s never good to have an outstanding balance at the end of a billing cycle. This is especially crucial when trying to build and sustain credit scores. Payment history and credit utilization make up nearly 70% of your credit score combined. 85% of your credit score is directly under your control but credit history and utilization are the most important.

Payment history is how often you’ve paid on time at the end of a billing cycle and not let any debt roll over onto the next month. Once payment is more than 30 days overdue it gets reported to the credit bureaus and starts detracting from your credit score. The longer it's been since you paid--and the more money you owe--the lower your credit score and creditworthiness will drop. How many late payments you have and how recent they are will affect your score.

There is often a grace period of a few days between the billing period closing date and when an amount accrues interest so you have time to submit a payment. However, there’s one good reason to pay on (or before) the closing of a billing cycle: credit utilization.

What is credit utilization?

Credit utilization accounts for 30% of your credit score and is how much money you owe divided by your credit limit.

Here are some examples:

• Assuming a credit limit of $2000 on a card, owing $500 at the end of the month would mean a credit utilization rate of 25%. As a general rule of thumb, you want your credit utilization rate to be under 30%. However, account holders with the highest credit scores usually sit under 10% utilization, averaging 5%. You can also pre-pay your bill to show 0% utilization on the closing date.
• Another option is to use your credit card as a debit card and clear debts as soon as the payments are processed. This is great to build healthy credit card use and encourage lower credit utilization.