How to use a credit card: Part 3.

In the last post I went through the basics of credit. It was in no way comprehensive but I tried to touch on the things someone most needs to know in order to manage their credit score and understand how it's created and maintained. In this post, I'll get to the point of all this: how to use a credit card.

Let's start with three popular reasons someone might obtain a credit card.

1. To ease the cost of day-to-day living. This is, in my opinion, the most common reason people apply for cards. And with our mediocre dedication to the financial education of youth, it's also how we think of credit cards when we're just starting out on our own: supplementing the cash we have (or, in the case of many students, don't have). If it's true that fully half of Americans could not come up with $400 in an emergency, then it's easy to see the void credit fills when there's so much uncertainty piled on top of bills, childcare expenses, student loans, groceries, transportation, and the tiny bit you might set aside to do something nice, just to to feel human.

2. To build good credit. This is popular too, and has become more so over the last decade as sites like CreditKarma allow people to see an approximation of their credit scores and track how their decisions affect them for good or ill. Read reviews of secured cards on any website and you'll hear the same story over and over: "I needed to rebuild my credit after bankruptcy/a divorce/an expensive hospital stay/defaulting on my student loans," etc. etc. etc. etc. Because credit card companies report to the credit bureaus each month, it is an incredible opportunity to increase your credit score as time goes on. When factors like number of open accounts, credit utilization, payment history, and average age of accounts are so important, even using just one card responsibly can really have an amazing impact.

3. To reap rewards. You may have seen articles every now and then about how one crazy guy has 98 credit cards and uses them to fly all over the world and stay in luxury hotels, all for free. I hate those articles. But they illustrate the fact that you can make rewards credit cards work for you. You don't have to be nuts, or have half a dozen of them. If you enjoy analyzing the impact of your spending on miles or points accrual, and especially if you enjoy planning vacations and compiling information to get the best rates, then rewards cards are a no-brainer. But it's not just about travel - cash back cards can be pretty great too, especially if you have better-than-average credit.

Credit cards are also useful when renting cars and booking hotel rooms, as the use of a debit card usually requires several extra steps like employment and housing verification. Rental car companies in particular will put a hold on the card for a certain amount (in the low hundreds of dollars) while you rent, and it's hard to have a good vacation if your debit card is missing a chunk of change.