Credit cards can be a useful way to build your credit score and gain airline points, cash returns, and other benefits. But they’re like any tool: they have benefits and downsides. In the case of credit, it’s worryingly easy to run afoul of the downsides, especially when money is tight. TVO Today sat down with a few Canadian experts to talk credit-card do’s and don’ts.
Do: Pick a credit card that’s right for you
Many people start out with a generic credit card from their bank or with a student credit card, says Natasha Macmillan, director of everyday banking at RateHub.ca. But she recommends regularly checking in on your spending to see whether it’s time for a change. “That’s where you really get the biggest benefit: starting to identify where you spend the most,” she says.
Natasha Macmillan is director of everyday banking at RateHub.ca. (Courtesy of Ratehub.ca)
Different credit cards offer different kinds of rewards. Picking a card that offers more for grocery purchases or for travel purchases lets you maximize what you’re getting from the company in exchange for using their service. Even many credit cards without an annual fee offer rewards, so it’s worth looking at what you’re getting. “Especially at times right now where it can be tough financially, you can look at getting a no annual fee credit card or you can kind of look at getting cash back for where you're spending,” Macmillan says. “There are ways to maximize your return.”
The process of figuring this all out starts with research and learning what credit cards are out there. The Financial Consumer Agency of Canada, a government agency whose job is helping people gain financial literacy, offers a credit-card comparison tool that might be a good place to start.
Don’t: Apply for a credit card without knowing your credit score
Using credit cards can be a good way to build your credit score, which lenders (like banks) and providers (like landlords) look at to assess how responsibly you use money and make decisions about whether to loan money or rent accommodations to you.
But even applying for credit cards can negatively affect your score if you’re turned down. That means it’s important to know what your score is and look at your credit report before applying for a credit card. FCAC has the basics here on how to understand your score and access your report.
If you want more guidance, RateHub’s credit-card finder will check your credit — through a “soft credit check,” which won’t affect your credit score — and match you up with a few cards that may be best for you. It’s a bit more user-friendly than the FCAC credit-card comparison tool. As when using any service, you should be aware when giving out personal information. Here is a link to RateHub’s privacy policy.
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Do: Pay attention to welcome bonuses and other promotional rewards
Credit is big business, and credit-card companies and the institutions they partner with make big money providing their service. That means they’re always looking for more customers. Welcome bonuses and introductory offers like a temporarily low interest rate are good ways to entice new ones — and, while they shouldn’t be the only reason you apply for a specific card, they’re worth paying attention to, says Macmillan.
If you’re looking within a certain class of card — for example, one that offers travel perks — or having trouble choosing between two cards that are very similar, “we recommend looking at the promotional reward offers,” she says. “Whether that’s no annual fee for the first year or an extra bonus for signing up, that can be a great differentiator.“
Don’t: Apply for a credit card on impulse
Again: stores and banks that offer credit cards really want your business, even if the cards seem free to use. For those companies, your financial actions — like buying things or running a balance on your card that you have to pay interest on — are the product. As a result, companies can be aggressive in offering their products to you. (Who among us has not been confronted by a cashier offering the opportunity to immediately apply for a store credit card?)
Financial actions like applying for a credit card are best taken after pausing to think, since they can have such an impact on other areas of your life. “Consumers should read the terms and conditions of the credit card application and agreement carefully,” FCAC told TVO Today by email. “They should ask questions about anything they don't understand.”
Do: Pay off your statement balance in full (or at least pay the minimum amount)
When it comes time to pay off your new credit card, it pays to carefully read your statement. There are three main numbers to focus on, Macmillan says: your statement balance, the minimum payment amount, and the payment due date.
Your credit card’s statement balance is the amount you need to pay to cover all the credit that you used in the past payment period. (Paying it off most likely won’t make your balance $0, since by the time you need to pay for the last period, you are in a new period.) The minimum payment amount, which is often relatively small in comparison to your statement balance, is the lowest amount you can pay without negatively affecting your credit score.
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Paying at least the minimum amount on time is really important, so it’s key to make sure that money gets paid each month. Macmillan (like this TVO Today reporter) uses her calendar to take care of this: “I know I need to pay my AMEX by the 16th. So I have a reminder two days earlier to ensure that the payment hits the account.”
You can also automate withdrawals to your credit card from your bank account, but doing it manually is an opportunity to check your statement. Macmillan suggests reading through the charges on your statement each month because this practice lets you make sure there are no fraudulent charges or double charges on your card. If you do see them, she recommends contacting the credit-card company and, in the case of double charges, the retailer involved.
Don’t: Carry a balance on your card (if you can avoid it)
Carrying a balance from month to month on your credit card can be dangerous, because credit cards have much higher interest rates than, for example, bank loans. An interest rate of around 20 per cent is common. Once you start carrying a balance, it can become very difficult to pay off. “Not being able to pay the full amount owing is a sign [consumers] may be spending more than they can afford,” the FCAC tells TVO Today by email.
If you’re in this situation, give yourself a break, and remember: finance can be challenging, especially in expensive times. You’re certainly not the only one. You could consider heading over to the TVO Today explainer on how to make a budget and reassessing where your money is going.
Ontario Hubs are made possible by the Barry and Laurie Green Family Charitable Trust and Goldie Feldman in Memoriam.
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