In most relationships, there tends to be a “give and take” mentality that is mutually agreed upon from the start. Your relationship with credit cards is no different. While credit cards offer ease and financial comfort when it comes to obtaining goods and services, their “buy now, pay later” philosophy comes with the large commitment of promising to use future income to pay past purchases.
THINGS TO CONSIDER BEFORE COMMITTING
- Know yourself and your habits. It’s important to self-assess before applying for a credit card. For example, if you’re a spender, applying for a credit card with a lower limit might work in your best interest, by limiting that “buy now, pay later” mentality.
- Set rules for the use of the card and how you plan to make payments. A credit card must be used, the bill received and the payment made on time in order to build a positive credit history. Make sure you have or will have the money to pay off the card, or at least the minimum payment, at the time of the purchase and that you know when the payments are due. Setting reminders on your phone or marking the payment due date down on a calendar are helpful ways to stay on track.
- Be choosy about obtaining credit. Limit the number of cards you carry. Do you really need more than one card? Don’t fill out department store surveys and be careful when shopping around for credit. Too many “hits” on your credit report can actually lower your credit score.
- Understand the costs associated with your card. Are there monthly fees? Annual fees? How is interest charged on your credit card? Take into consideration your spending plan to see how the credit card payments, interest, or even rewards program will work into your budget and financial goals.
KNOW YOUR TYPE
Before committing to a credit card, it is important to know which type of card will work best for your needs, budget and credit score. Everyday credit cards from banks, financial institutions and credit card companies, and secured credit cards – credit cards obtained by providing a security deposit in case payments aren’t made – are the only credit cards that will help you build (or rebuild) credit. Debit Visa or Mastercards and prepaid credit cards are loaded with your own money, therefore the borrowing of money doesn’t take place and credit cannot be built. If you’re looking to build or rebuild credit, start by getting an everyday or secured credit card.
If you are already establishing positive credit, but tend to be more of a spender, prepaid credit cards work great as a budgeting tool for flexible expenses, as your own money is loaded onto the card and overdraft is not an option. If you have room in your budget and want to receive something other than a good credit score from your card, credit cards with money back or travel rewards can be useful in achieving short term goals like a vacation or a new computer. Though these cards sound appealing, their annual fees and interest rates may be higher. It’s important to do your research, or talk to a financial advisor to see which credit card will work best for you and your budget.
PLAYING IT SAFE
It’s easy to get caught up in a new credit card relationship – especially when hopes of a vacation, money back or a higher credit limit may be involved. However, the risks that are associated with a credit card cannot be forgotten. Playing it safe will not only help boost your credit score, but will help set the tone of your future financial well-being.
How to Practice Safe Credit:
- Understand how credit cards work. Having this knowledge will give you the upper-hand when deciding how to use your credit card.
- Pay your credit card charges in full every month before the due date. If you do this, you won’t be charged interest. If you are unable to pay the balance in full – ensure you pay at least the minimum monthly payment by the due date.
- Try to avoid taking cash advances on your credit card, unless it’s an emergency. Interest starts to be charged from day one for credit card cash advances, and it can add up quickly.
- Limit the amount you charge on your cards. Never charge more than you can comfortably afford to pay off in full.
- Keep an eye on what you’re spending with credit cards using online banking, a mobile app or by manually keeping a budget. If you notice your habits changing for the worst, it may be time to reassess your relationship with your cards.
WHEN IS IT TIME TO MAKE THE CUT?
Unfortunately, not all relationships are healthy. Sometimes, financial self-reflection is needed to figure out whether or not it’s time to cut ties and reach out for help. Warning signs of an unhealthy credit card relationship tend to include behaviour such as:
- Consistently paying only the minimum balance on your card (or not at all).
- Racking up past due payments.
- Using one credit card to pay the balance on another.
- Receiving or ignoring calls and messages from collection agencies.
- Negatively affecting your credit score because of your relationship with your card(s).
If you’re beginning to worry about how your relationship with credit is affecting your finances, contact us for a free and confidential debt consultation. Our Licensed Insolvency Trustees understand how easy it can be to get caught up in an unhealthy relationship with credit cards, and will work with you to find the best solution for your debt problem.
Rob McLernon is a Licensed Insolvency Trustee (LIT) and a Chartered Insolvency and Restructuring Professional (CIRP) with our Nova Scotia Grant Thornton team. He’s been working primarily in the consumer insolvency area since 2003. In addition to being a LIT, he is a Certified Insolvency Administrator and Counsellor. Rob has extensive background knowledge on debt restructuring and brings this to his current role.