Although credit cards are a common and often convenient payment tool, even a “small” balance can turn into a major debt problem faster than many people realize. From finding the right credit card to managing credit card bills, read on to learn do’s and don’ts to help you use your credit cards well – and some of the key ways to control credit card debt.
Getting a Credit Card – What to Check
One of the best means to ensure credit you have is used in the best way for you, is to understand how the credit works. Especially when it comes to credit cards many people get caught up in the potential rewards and convenience, forgetting about what can become problematic.
From the get-go, when you’re looking for a credit card (and virtually any other type of banking or borrowing product) aim to be a savvy and well-informed consumer by spending some time researching and comparing what’s on offer so you have an idea as to what is right for you and your needs.
The Financial Consumer Agency of Canada’s online credit card comparison tool can be a helpful place to start. Here you can view and compare different credit cards, features, fees and more.
Look closely at the terms and conditions of credit cards before making any commitments. Some key details to check into include:
- Interest rates (be certain to understand what may be only a temporary introductory rate!)
- Fees (annual or otherwise)
- Transaction and ATM fees, as well as foreign exchange fees
- Rewards and bonuses
Secured and Prepaid Credit Cards
If you’re looking for the convenience of a credit card but prefer not to borrow, you may want to consider a secured credit card, or a prepaid card as alternatives to standard credit cards.
Prepaid Credit Cards: Prepaid credit cards are sometimes called ‘reloadable’ or ‘pay as you go’ credit cards, and you can often purchase them at standard retail locations like grocery stores or pharmacies.
- You’ll load the card with your own money and as you use the card the dollar amount of your purchases is deducted from the balance.
- The card stops working when you’ve spent the total and you can then reload it with more money.
- You can get and use a prepaid card even if you have a low credit score, and they aren’t reported on your credit history.
If you’re aiming for a product that can help build up your credit history, you might opt for a secured credit card instead.
Secured Credit Cards: Secured credit cards are like a standard credit card in that you can borrow and then pay later, but the key difference is that you put down an initial deposit with the bank / lender.
- Your deposit often determines the amount of credit you’ll have available, but in some cases, you’ll be granted a higher credit limit than the deposit on hand.
- It’s important to understand that your deposit doesn’t count as a payment on your balance.
- Several lenders in Canada offer secured credit cards that report secured credit card information to credit bureaus, although not all will. Be sure to clarify this if it is a deciding factor for you.
More on Managing Credit Scores
Smart Credit Card Use – Do’s and Don’ts
With standard credit cards always be aware that purchases will incur interest if you don’t pay the balance in full when the bill arrives. The snowball effect of compounding interest can make the true cost of even modest charges very expensive. Here are some easy do’s and don’ts to use your credit card well:
Don’t Use Your Credit Card if You Don’t Have the Cash
There are of course reasons for using credit instead of cash; sometimes carrying a credit card is safer than cash, and you might be more likely to turn to a credit card for things like recurring payments and online purchases. Avoid a potential pile-up of interest costs though by not making credit card charges before you have the funds available for the purchases.
- If you’re using a credit card for day-to-day purchases get in the habit of paying the balance when you get home.
- Particularly with a budget that doesn’t leave much money between paydays, it’s easy to end up over budget because money you’ve earmarked for a credit card payment needs to be spent elsewhere in the meantime.
Also, if you’re trying to keep a close watch on your spending, you may find you pause a bit longer or even re-think some purchases when you’re dealing with cash over credit.
Do Use Cash for Transactions That Are Cash-Like
Not all credit card purchases are subject to an interest-free grace period, so it’s best to use actual cash (or debit) for transactions considered ‘cash-like’ such as:
- Cash advances and credit card cheques
- Wire-transfers or money orders
- Lottery ticket or other gaming transactions
Not only can you be charged interest from the date of these cash-like transactions until they’re paid off in full, but the interest rate at which you’re charged for these is often higher than for regular purchases.
More on Understanding Interest Rates
Don’t Be Swayed by Card Rewards
It’s easy to justify making purchases with credit over cash when you have the added benefit of getting rewards, points or bonuses – but using a credit card that earns points or even cash rewards might not be a good plan if you don’t have the funds to pay off purchases right away before they accumulate interest.
- Reward program values are often near 1% of what you spend, and your interest costs are generally far higher if you carry a balance for even a single month.
Pay attention to your habits and any emotions as you make purchases. Is the lure of rewards tempting you to overspend, impulse spend, or sway you on purchases you don’t really need or want?
Do’s and Don’ts for Dealing with Credit Card Debt
If you’re struggling to manage credit card bills or pay off credit card debts know that you are not alone. Sands & Associates’ Licensed Insolvency Trustees help clients struggling with credit card debt every day, and in recent Consumer Debt Studies credit card debt has been called out five times more than other types of problem debt by insolvent BC consumers. Here are some tips to help you regain control of your credit card debt:
Do Be Aware and Proactive Dealing with Credit Card Debt
Treat all your card accounts as important, keeping track of account balances, purchases and payments.
- Don’t skip any payments, nor make payments late.
- This goes for all accounts, including things like cellphone and internet plan bills. Even though these types of bills may not all benefit your credit score, they can negatively impact your credit history if unpaid.
- A missed credit card payment can result in your interest rate being drastically increased.
- Talk to your lender ASAP if you think you won’t be able to make a payment as required. Especially where it’s a one-time situation, you may be extended a deferral or other courtesy.
Don’t Get Caught in Unknown Credit Card Fees
Lenders will not usually inform you if you’re about to incur additional fees, the onus is on you the borrower to be knowledgeable from the beginning – and to stay on top of changing account terms. Common fees that can catch you unaware and add up to big cost may include, but not be limited to:
- Balance protection insurance
- Being charged a fee each time you take a cash-advance
- Over-limit fees for exceeding your credit card’s credit limit
- Currency conversion costs for using your credit card out of the country
Do Always Pay More than Your Minimum Monthly Credit Card Payment
If you can’t pay your balance off in full then understand that to pay off your credit card debt within a reasonable amount of time you will have to stay well ahead of the compounding interest. If you’re only making minimum monthly credit card payments, it’s almost certain you’ll be trapped long-term in credit card debt. For example:
- If you only paid the minimum monthly payments on a credit card with a $5,000 balance and 18% annual interest rate, it would take almost 19 years to pay off and result in almost $4,800 of interest charges. It would take close to $9,800 and near two decades to pay off the original $5,000 debt.
- See more using Financial Consumer Agency of Canada’s credit card payment calculator.
If you’re having trouble paying more than your minimum monthly credit card payments this can be a sign of financial troubles ahead. Another debt warning sign common in this situation would be if you are trying to pay off your debt but haven’t been able to stop using credit for regular living expenses.
More on The Minimum Payment Trap
Don’t Get Stuck in Credit Score Concerns
Be cautious about taking on too many credit cards (or other credit products) or ones with too high a limit in an attempt to benefit your credit score. Having some diversity in credit products can favourably impact your credit score, but this needs to be balanced with considerations such as:
- Your risk of using more credit than you can afford to pay back
- Account balances getting too high to look good “on paper”
- At some point having too much credit can negatively impact your score
Debt is expensive – and it’s never a good idea to take on more than you can afford to pay back. Even keeping borrowing to modest levels there are many situations or events out of our control that can make it difficult, if not impossible to pay back debt as intended.
Do Seek Debt Advice from a Licensed Insolvency Trustee
It can be difficult to reach out to a professional; many people want to pay off their debt independently, or simply feel too embarrassed to ask for help, but please know that you are not alone – and that you have options. Resources and supportive solutions to consolidate, cut and restructure debt are available for individuals and businesses.
Licensed Insolvency Trustees are Canada’s qualified debt management professionals who can help you evaluate your situation without judgment and get you solutions to deal with your debt that suit your unique needs.
- Connect confidentially for a free one-on-one consultation to discuss your situation and determine all your options.
- From there you’ll be able to make informed decisions and plan how you want to move forward, past the challenges of credit card and other debt.
No judgment, no cost, no pressure to commit to any process. Just expert advice and friendly support. Book your confidential debt consultation with Sands & Associates today – virtual and in-person services are available for residents across BC.