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A credit card can serve as a fantastic financial tool and offer a number of perks, from the opportunity to build your credit to the chance to rake in lucrative rewards. However, using a credit card responsibly is key to reaping those benefits. Otherwise, a credit card is more likely to harm your financial well-being than help it.

Using a credit card responsibly involves sticking to basic rules like making on-time payments and avoiding practices such as spending more with your card than you can afford to pay off. By learning some tips for how to use a credit card responsibly, you’ll be well on your way toward making the most out of this financial tool.

How Do Credit Cards Work?

A credit card is a payment card that offers access to a revolving line of credit. You can tap into this credit line for a variety of purposes, including making purchases, completing balance transfers, and taking out a cash advance. Cardholders can borrow up to their credit limit, which is largely determined based on their creditworthiness and represents the maximum amount they can borrow.

It’s necessary to make at least a minimum payment by the due date each month in order to avoid a late fee. However, to avoid paying interest entirely, cardholders must pay off their balance in full each month; interest accrues on any balance that rolls over from month to month.

Many credit card companies charge compounding interest, which means that not only will you owe interest on any outstanding balance, you’ll also end up paying interest on the interest. That’s because this interest is calculated continually, then added to your balance, and it may be compounded daily. You may be shocked to see how much credit card interest you’ll pay if you only make the minimum payment each month.

Understanding Your Statement

A crucial component of knowing how credit cards work is understanding your monthly credit card statement. Your statement contains a number of important pieces of information about your credit card account, including:

•   Your account information

•   Your account summary, including your payment due date

•   All purchases made with the card

•   Your total credit card balance

•   The minimum payment due

•   When the credit card payment is due

•   Your available credit

•   Interest charges

•   Rewards summary

Many of these details are key to know in order to ensure you’re using a credit card wisely. For instance, knowing your payment due date will ensure you make your payment on time, avoiding any late fees and a ding to your credit score.

Checking on your available credit can help you ensure you’re not using too much of your credit, which can drive up your credit utilization rate and subsequently drag down your score.

10 Tips For Using a Credit Card Responsibly

To make the most of your credit card, here are several credit card rules to keep in mind — as well as some guidance on what credit card behavior to avoid.

1. Avoid Making Too Many Impulse Purchases

To use a credit card responsibly, you want to avoid overspending with it. How many is “too many” purchases depends upon how much your impulse buys cost and how easily they fit into your budget. If you know you can pay off your credit card balances and otherwise meet your monthly expenses and savings and other financial goals, then that’s an entirely different situation from one in which your impulse purchases are too costly to promptly pay off and/or prevent you from meeting other financial responsibilities or goals.

If you enjoy making spontaneous buys, you may consider including this as a line item in your monthly budget and then sticking to it. This could add enjoyment to your life without causing financial problems down the road.

2. Use the Right Credit Card

There are a variety of different types of credit cards, and depending on how you plan to use your credit card, one option may make more sense than another. Some credit cards are there to help you build your credit, while others pay out generous rewards.

Selecting which card is right for you requires a look at your financial habits and current situation. For example, if you know that you often end up needing to carry a balance, then it may make sense to find a card that prioritizes low interest rates. Or, let’s say you’re a frequent vacationer — in that case, you might benefit from a travel rewards card.

3. Take Advantage of Benefits Offered

Interested in another way to use your credit card responsibly? Signing up for eligible rewards programs can help cardholders make the most of their card. Each type of credit card may have slightly different reward programs. See what the full range perks offered by your card are — and if you’re not sure, check the card’s website or ask the credit card company for specifics. For example, you might need help understanding what unlimited cash back really means in terms of how you might benefit.

Once you know what perks are available, you can use them strategically. You may discover that the card(s) you have don’t provide the best benefits for you. For example, maybe your card offers one of its highest rewards rates for gas purchases, but you don’t do much driving. In that case, you might be better served by a rewards card that offers a flat rewards rate or that prioritizes a category in which you’re a frequent spender.

Finally, if you’re earning rewards points, it’s also important to consider the best way to use them. Sometimes it’s possible to get a bigger bang for your buck if, say, you use your rewards points at an approved store rather than opting for cash back.

4. Sign Up for Automatic Payments

To avoid missing payments or making them late, consider signing up for automatic payments or autopay. By enrolling in autopay, you’ll regularly have money transferred from a linked account each month in order to cover the amount due (or at least the minimum payment required).

Another option is to sign up for automatic reminders about payment due dates (by text, for example, or by email). You can do this through the credit card company or via a calendar app.

What’s most important is coming up with a plan that works best for you to ensure you make your payments on time. Otherwise, you could face late fees and adverse effects to your credit score.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

5. Regularly Check Your Statements

Mistakes do happen on credit card statements and, unfortunately, fraudulent activities could impact your account. Check your statement every month to ensure that you made all the charges that appear, and that any payments you’ve made are accurately reflected.

If something is missing, review the statement dates to see if the transaction may have happened right after the statement cut-off date, for instance. If something seems off, contact your credit card company for clarification. In the case of any potentially fraudulent activity, it’s important to report credit card fraud to your credit card company immediately.

6. Pay More Than the Minimum

You’ve just read about how credit card interest works, so you’ll remember that only making the minimum payment doesn’t get you out of paying interest. To avoid credit card interest charges, you’ll need to pay off your monthly statement balance in full.

Understandably, this isn’t always possible, but even then, it still helps to pay as much above the minimum as you can afford to. This will at least cut down on the outstanding balance that accrues interest.

7. Don’t Close Out Old Cards

While it might seem logical to close out an older credit card you’re no longer using, you’ll want to think twice before you cancel a credit card. That’s because doing so can have adverse implications for your credit.

For starters, canceling a credit card will lower your credit utilization rate, which compares your total outstanding balance to your overall available credit limit. Closing out a card will cause you to lose that card’s credit limit, thus lowering the amount of credit you have available.

Closing an old card could also have an impact if the card in question is one of your older accounts. Another factor that contributes to your credit score is the age of your credit. By closing out an old account, you’ll lose that boost in age.

That being said, there are scenarios where it might make sense to close a card, such as if it charges a high annual fee. Just be mindful of the potential effects it will have on your credit before moving forward.

💡 Quick Tip: Aim to keep your credit utilization — the percentage of your total available credit that you’re using at any given time — below 30% (or lower). This could help you to maintain a strong credit score.

8. Maintain a Low Credit Utilization Rate

Another key tip for responsible credit card usage is to avoid maxing out your cards. Instead, aim to keep a lower credit utilization rate — ideally below 30%. The lower you can keep this utilization rate, the better it is for your credit score.

9. Avoid Unnecessary Fees

Another part of using a credit card responsibly is being aware of all of the fees you could face, and then taking steps to steer clear of those costs. Your credit card terms and conditions will spell out all of the fees associated with your card, as well as the card’s APR (or annual percentage rate) and the rules of its rewards program.

Many credit card fees are pretty easy to avoid. For instance, if you’ll incur a fee to send money with a credit card, simply avoid doing that and look for an alternative route. Similarly, you can avoid late payment fees by making on-time payments, and over-the-limit fees by not maxing out your credit card.

10. Avoid Applying for Too Many Cards

As you get into the swing of things with using your credit card, you may feel tempted to keep acquiring new cards, whether to keep on earning rewards or to capitalize on enticing welcome bonuses. But proceed with caution when it comes to applying for credit cards.

Applying for credit cards too frequently can raise a red flag for lenders, as it may suggest that you’re overextending yourself and desperate for funding. Plus, each time you submit an application for a credit card, this will trigger a hard inquiry, which can ding your credit score temporarily. Consider waiting at least six months between credit card applications.

The Takeaway

When used responsibly, credit cards can be helpful for a whole slew of things, from making online purchases to building your credit. The key phrase to keep in mind is “when used responsibly.” To stay on top of your credit cards, tips like signing up for automatic payments, making the most of the rewards programming, and using the right type of credit card for your needs are all important.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOCC1023001

The Dow Theory is a framework for technical analysis of the market. It comprises several market concepts that attempt to explain how the stock market tends to behave.

The original financial theory posited that if the Dow Jones Industrial Average or the Dow Jones Transportation Average (then known as the Dow Jones Rail Average) advances significantly above a previous important average, the other average will do the same in the near future. Conversely, if one index begins to fall, Dow Theory forecasts that the other will likely follow suit.

Using this theory, investors can form a strategy to buy when the market is low and rising, and sell when it is high and going down.

The History of Dow Theory

Although created more than a century ago, Dow Theory remains popular with traders who commonly use it today. Charles H. Dow, founder of Dow Jones & Company, developed the financial theory in 1896 and created the first stock index, the Dow Jones Industrial Average. Dow, along with Charles Bergstresse and Edward Jones, also co-founded The Wall Street Journal, where Dow published portions of the Dow Theory.

Although Charles Dow died before he could publish the entirety of the ideas that make up the theory, others have published contributions to the theory over the years. Some of these publications include:

• The Stock Market Barometer by William P. Hamilton (1922)

• The Dow Theory by Robert Rhea (1932)

• How I Helped More than 10,000 Investors Profit in Stocks, by E. George Schaefer

• The Dow Theory Today, by Richard Russell (1961)

What Is Dow Theory?

The Dow Theory suggests that traders can use stock market trends to assess the overall economy and the state of various industries and then use it to form an investment strategy. Using the Dow theory, one could understand current market conditions and make predictions about the direction the market would take and, therefore, the direction individual stocks might take.

As the economy has changed over the years, parts of the theory have also shifted. For instance, originally, the theory centered around transportation stocks since the railroad industry was such a significant contributor to the economy at that time. While transportation stocks are still a crucial part of the economy, the Dow theory can apply to all types of industries, including newer ones, and forms the basis of many tools in technical analysis such as the Elliott Wave and accumulation and distribution (A/D).

There are six main principles that make up the Dow Theory. They are:

1. The market discounts everything.

2. There are three kinds of market trends.

3. Primary trends occur in three phases.

4. Indices must confirm each other.

5. Volume should confirm price.

6. Trends persist until there is a clear reversal.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

What Are the Six Tenets of Dow Theory?

Here’s more about each of the six principles and how they apply to both institutional and retail investors.

1. The Market Discounts Everything

Like the efficient markets hypothesis, this theory holds that market prices already reflect all available information, so only future events could affect stock prices. Since stocks are always trading at fair market value and are not under or overvalued, investors should make decisions based on market trends.

For instance, if investors believe a particular company will report positive earnings, the market will already reflect this before the announcement, with demand for shares going up before the release of the report.

Those who rely on technical analysis tend to believe in this theory, but investors who use fundamental analysis don’t agree that market value reflects a stock’s intrinsic value.

Recommended: Intrinsic Value vs Market Value: Key Differences

2. There Are Three Kinds of Market Trends

The second principle of Dow Theory is that there are three kinds of market trends, delineated by their duration.

Primary Trends

These last at least one year and are major market trends including bull trends, bear trends, or sideways trends. They are the most important trends for long term traders to look at, but the secondary and tertiary trends can help identify a specific opportunity such as a reversal in the market.

Secondary trends

These trends only last a few weeks or months. They generally include trends where the price moves in the opposite direction of the primary market trend.

Minor trends or Tertiary trends

Used primarily by day traders, these trends last less than three weeks.

3. Primary Trends are Split into Three Phases

The phases of trends depend on what happened to the price prior to the trend as well as market sentiment. The phase names are ordered differently in a bull and bear market. In a bull market, the phases are: accumulation, public participation, excess and distribution. In a bear market the order reverses.

Accumulation

Assets are low, so smart investors start to buy at this time before the market goes back up.

Public Participation

After the accumulation period and as the market starts to go up, a broader number of investors start to see the trend and begin buying assets, so prices increase significantly and quickly.

Excess and Distribution

In this phase, the general public buys, but informed investors see that the market is at a high and begin selling or shorting the market before it starts to decrease.

Recommended: Exit Strategies for Investors: Definition and Examples

4. Indices Must Confirm Each Other

This principle claims that primary trends observed in one market index need to be the same as trends observed in another market index. Originally, the two important indices were the transportation index and the industrial average, but this has changed with the economy over the years. The same principle now applies to other indices. Although industry and transportation are still linked, today, many goods are digital so there can be an increase in the sale of goods without the same increase in transportation.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

5. Volume Should Confirm the Price

This principle states that a strong market trend should correspond with a high trading volume. If there isn’t a large volume in trading, then a trend is not as strong of an indicator of market direction. A low volume trend may not be an indicator of a larger market move.

6. Trends Persist Until there is a Clear Reversal

Another principle is that a market trend will continue until there is a strong indicator of a reversal. Essentially, the market will continue to rise or fall until a primary trend reversal occurs, so investors should not consider secondary and tertiary trend reversals as larger market trends.

Of course, it can be difficult to spot the difference between a primary and secondary trend, so sometimes a secondary trend may actually show a reversal in the market, and a primary trend may turn out to be a misleading secondary trend.

The Takeaway

The Dow Theory consists of six principles that may be used to help explain how the stock market behaves. Although the Dow Theory is over 100 years old, it is still popular and still widely used today for a reason.

Investors often use the Dow as they’re putting together an investment strategy. The Dow and other trading theories may be helpful as you build an online investment portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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