Credit cards are arguably the financial products we use (and often misuse) the most in our daily lives. They can play a key role in building credit in a new country and earning rewards that can help you save on travel when visiting family back home. With that in mind, here are the do’s and don’ts to ensure the piece of plastic in your wallet is helping you reach your financial goals (and not the other way around).
DO Get your credit score checked
Your credit score is a three-digit number that’s used by everyone from lenders (such as banks) to landlords in order to determine how financially responsible you are at paying down debts on time. Ranging from 300 to 900, the higher your credit score, the better.
Many premium credit cards require a minimum score of 650. Get your score checked in advance to find out which cards you may be eligible for. To view your credit score, you can either pay a credit reporting agency or use one of the many websites which provide it for free. Counter to popular belief, checking your credit score on your own has no impact on your credit rating, so you shouldn’t hesitate to get your score checked. In fact, it’s better to regularly monitor your score to get a sense of where you stand financially.
DON’T Just go with a credit card from your bank
Comparison shopping isn’t just a key strategy for holiday purchases or scooping up the best airline tickets. If you want to maximize your rewards and add one of the best credit cards in Canada to your financial arsenal, you need to shop around to see what different financial institutions have to offer and not limit your credit card choices to those of your home bank.
According to a study conducted by Ratehub.ca – a website that compares credit cards, rates, accounts and insurance in Canada – in early 2018, Canadians who do not compare their options and fail to go with a top credit card can miss out on upwards of $1,000 in rewards.
DO Actually use your credit card (even if only occasionally)
There are several advantages to using a credit card. For one, most credit cards offer rewards (such as cash back or travel points) on every dollar you spend. Plus, responsible credit card use (i.e. paying off your balance in full every month) can help establish a solid financial track record and improve your credit score.
Even if cash or debit is your payment methods of choice, it’s a good idea to use at least one of your credit cards to make small or recurring payments. Having all of your credit cards be completely inactive may negatively impact your credit utilization rate (the total credit limits of all your loans and credit cards), and in turn, your credit score. By having your credit card stagnant, you could also risk having any rewards you accumulated go expired or have your credit card get closed altogether.
DON’T Carry over a balance
Keeping tabs on how much you’re spending and paying off your balance in full every month is credit card best practices 101 and ensures you pay nothing in interest fees.
If you don’t pay your credit card balance in full by the statement due date or only make the minimum payment and carry over a balance however, not only will you incur interest (most credit cards charge an annual interest rate of 19.99 percent) and hurt your credit score, but you may also risk having your account labeled as being in poor standing and losing out on any rewards or promotional offers you may have otherwise been entitled to.
The way interest charges are calculated vary by the terms and conditions of each credit card, but here’s a simplified example: Let’s say you carried over a balance of $1,000 for each and every day in the month of October and your card’s annual interest rate is 19.99 per cent. First, you would divide your card’s annual interest rate by the number of days in the year (19.99 ÷ 365 = 0.0548 per cent). Then, multiply this percentage (0.0548 per cent) by the balance at the end of the day ($1,000 x 0.0548 per cent = $0.54). Since our example assumes the carried over balance was $1,000 for every day in October, your interest charge at the end of the month would be ($0.548 x 31) $16.97. In most real-life scenarios however, the carried over balance doesn’t remain constant and interest charges can quickly balloon as more payments are charged on the card and a larger balance is carried.
DO Pick a credit card that matches your financial goals and habits
Not all credit cards are created equal, so research and compare your options.
If you want to earn straight-forward savings, a cash-back credit card may be the right fit. Do your holiday plans almost always involve booking airline tickets? Then, you should consider one of Canada’s best travel credit cards. On the other hand, if you plan on only using your card for emergency purchases or if there’s a likelihood that you’ll carry over a balance, then you may want to ditch rewards and sign up for a low interest credit card.
You’ll also want to find a credit card that matches with your buying habits and offers bonus rewards on the types of purchases you make the most often (i.e. if you spend big on gas, you’ll want to consider one of the many cards that offer 4x the rewards on every dollar you spend at the pump). Not to mention, you’ll want to select a credit card that is accepted at the stores you frequent the most (i.e. Costco only accepts MasterCard).
DON’T Close your oldest credit card
Your oldest credit card is likely one of the earliest records of information on your credit report, and by closing it, you risk shortening the length of your credit history and lowering your credit score in the long run. That’s why the best course of action is to not cancel your first credit card, even if it’s collecting dust in your wallet and you’ve completely moved on to a newer, better card. The good news is that most “starter” credit cards have no annual fee, so it won’t cost you anything to keep it open.
While you never want to close your oldest credit card, it can sometimes be okay to close others. For example, if you have a third credit card with a large annual fee that you never use, it may be worth having it closed. However, you’ll have to take precautions to ensure the balance is fully paid off and no upcoming or recurring bills are being charged to it.
DO Read up on your card’s side perks
Aside from offering points or cashback, a number of rewards credit cards come with a cache of benefits ranging from complimentary access to airport lounges and discounts on car rentals to mobile device insurance that can cover repairs to your smartphone or tablet.
A card’s side perks are not always front and centre, so make sure you read through your credit card’s fine print for a full picture of what benefits you can tap into.
DON’T Use your credit card at the ATM
Withdrawing cash from an ATM using a credit card is almost always a bad idea. In most cases, you can be on the hook to pay considerable fees, as credit cards charge upwards of 23 per cent on what are known as cash advances.
Hyder Owainati is a content marketing specialist at Ratehub.ca, a website that compares credit cards in Canada as well as mortgage rates, high-interest savings accounts, chequing accounts, and insurance with the goal to empower Canadians to search smarter and save money.
Ratehub.caempowers Canadians to search smarter and save money by comparing mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance.
By Hyder Owainati
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