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So, while most people have no credit card debt, lots of people do. In fact, nearly a quarter of all Americans owe more than $3,000 on their credit cards. To avoid joining these folks—or to escape their ranks—you have to be careful when using credit. Let's start by looking at why you'd want to use a credit card in the first place.

Note

Though credit cards and debit cards are similar, they're not the same. Debit cards are tied directly to a bank account; credit cards let you borrow money from the issuer. Using debit instead of credit can keep you from overspending, but credit cards offer more protection if your card is lost or stolen. Lastly, credit cards affect your credit score (which you'll learn about on Your Credit Score), but debit cards don't.

Why Use a Credit Card?

You don't have to use credit cards. Though the Survey of Consumer Finances (mentioned in the previous section) shows that 73% of families have credit cards, roughly one quarter of American adults don't carry plastic. So if you're worried about your self-discipline, the smart choice is to not use credit cards at all. (The box on Your Credit Report has the story of someone who's gone this route, and you can read about more such folks at http://tinyurl.com/no-ccards.) That said, legitimate reasons to use credit cards include:

Convenience. It's easier to carry around a single piece of plastic than to deal with cash and checks. And a lot of people like the automatic recordkeeping that comes with using a card (especially online expense tracking).

Protection. Many cards will extend the warranties on the things you buy, and some offer insurance against theft. That's why most of us would rather have someone steal our credit card than a wallet full of cash—you rarely lose money if somebody else uses your card. (Credit card companies can charge you up to $50, but most won't hold you liable for any fraudulent charges.)

Building credit. As you'll learn in a moment, your credit score has a huge impact on your personal finances. Using credit cards carefully helps you improve your credit score so you can get the best rates on things like mortgages and other loans.

Rewards. Some credit cards offer cash back on things you buy. Others offer frequent-flyer miles or gift certificates.

But all these benefits are meaningless if you don't use credit cards responsibly: Miss a payment or carry a balance and you've negated your cash-back bonus for months (or years), and you've hurt your credit score. Pay your full balance on time every month and credit cards can be a valuable addition to your financial toolbox.

On The Money: The Pain of Paying

There's evidence that people spend more when using credit instead of cash. For example, a study in the September 2008 issue of the Journal of Experimental Psychology: Applied (http://tinyurl.com/APA-spend) found that paying with cash leads to "an immediate pain of paying". But "any payment made that makes the outflow of money less vivid, and thus less painful"—like using a credit card—"reduces the psychological barrier to spend." Another study found that people remember cash expenses better than those made with credit.

So it's not just you: In general, it looks like most people who use credit cards end up shelling out more when they pay with plastic than with cash. For more on this subject, see http://tinyurl.com/GRS-credit-spending.

Choosing a Card

There are hundreds of different credit cards out there, and they all claim they're offering a good deal. So how can you tell which one is best for you?

The biggest factor to consider is whether you carry a balance on your cards. If you typically carry a balance—or think you might in the future—focus on cards with low interest rates. On the other hand, if you pay your balance in full every month, look for a card with no annual fee, a solid rewards program, and at least a 21-day grace period.

Note

The grace period is the time between when you buy something and when you have to pay interest on it. Your