If you don't have methods for smart credit card use, it can be costly – Canadians have an average of $3,240 in credit card debt. Credit card debt repayments was also mentioned by 28 per cent of Canadians as a top financial stressor, according to our 2021-2022 Canadians and Money Survey.
This isn't meant to scare you! Credit cards are a handy tool – when used correctly. They’re convenient to pay with, offer perks in cash, gifts, and experiences, and help generate the credit history you need to take out loans for a car or mortgage.
But when used incorrectly, they can also lead to financial trouble and stress.
In this article, we’ll go over the basics of credit cards: what they are, what happens when you use them incorrectly, and ways to start using them smarter, even to your advantage!
A credit card is a financial tool that lets you buy things now and pay for them later. They come with a line of credit, which is essentially borrowed money. Naturally, you're required to pay this money back each month – failure to do so by a certain date means you'll incur interest on your balance.
Depending on your financial past and credit card needs, you can get a different credit limit. This is the line of credit mentioned above, and is how much you actually spend on your credit card. For example, if you have a card with an $1,000 limit, you can spend up to $1,000 before your card is maxed out – this is not recommended!
There are also many types of credit cards, designed with different functions and rewards to serve individuals with different needs. Here are the most common ones you’ll find on the market:
These reward card holders with cash incentives for making purchases, typically a small percentage of every dollar spent. The more you use this credit card, the more money you “make” back. It’s ideal for frequent purchases such as groceries and gas.
Rewards-based credit cards are like cash back credit cards, but you get points for each dollar you spend instead of cash. Accumulate points over time and later use them to redeem items and experiences, from restaurant gift cards and gadgets to household appliances and hotel stays.
With branded or store-based credits, you get rewarded for making general purchases on the card – you get even more rewards on these retail cards when you use them at the store they are tied to! You can get these types of credit cards from certain department stores, online retailers, clothing brands, and even gas stations.
Travel credit cards are one of the more popular types of rewards-based credit cards. These offer travel-related incentives often in the form of air miles, airport lounge access and priority boarding, and hotel stays.
Designed for undergraduates, student credit cards are often scaled back in terms of the perks it offers but they have less of an annual fee. It’s ideal for everyday expenses, as well as getting a head start at building credit history.
As the name implies, these cards cater to business owners and executives. They work like traditional credit cards, with business-related rewards, like office supply purchases, and functions, such as expense reports.
So far, we’ve gone over examples of unsecured credit cards – that is, cards that don’t require an initial deposit for you to use them. A secured credit card, then, requires exactly that: an initial deposit that can range from a small sum – around $50 or so – to greater values, in the form of jewelry or stocks. This deposit acts as collateral in case the card holder fails to make repayments. Secured credit cards are often issued to individuals looking to improve their credit scores or to build their credit history.
Users with outstanding balances on a high-interest credit card can transfer that balance to one with a lower interest rate. This is the purpose of balance transfer credit cards, some of which offer introductory interest rates at 0%. It’s particularly helpful in managing debt repayment.
As you can see, there’s a credit card for every need, lifestyle, financial history and capacity, and so forth. Though the particulars may vary, one thing’s for certain: how you use a credit card determines whether or not you get to enjoy its many benefits. It’s all about smart credit card use
One of the allures of credit cards is the power it gives us to spend beyond what we can afford at a given moment. Or, at least, to not have to think about the cost of a purchase until after we’ve made the transaction.
This often results in what Rona Birenbaum calls the ‘lifestyle creep’: "incrementally, over time, expanding one's lifestyle at a pace that's faster than the income growth.” Birenbaum is the founder and CEO of Caring for Clients, a fee-only financial planning and wealth management firm. It’s not about spending a lot in one go, she says, but doing so over a few years and waking up to discover “you have $15,000 on a credit card – and you can’t pretend you can pay it off in the next three months anymore.”
On the other hand, you could also be financially responsible with a credit card, paying your bills in full every due date, and spending within your means.
Until things go south.
Suddenly you have to solve an expensive problem with a credit card. “In that case, the credit card has acted like the emergency fund that the card holder didn’t have,” she describes. “It’s the unexpected job loss and a roof that needs repairing – a combination of things that just can’t wait.”
In either scenario, the card holder racks up debt.
Large sums of credit card debt generate poor credit scores. Poor credit scores affect your ability to get a loan, and raise the cost of other services, such as interest rates on insurance. Worse, debt robs you of your peace of mind – impacting your mental health and overall well-being.
The good news is that the flip side is also absolutely true. “Financial responsibility is not just an attitude, it’s a practice,” says Birenbaum. “For people that are financially aware and disciplined, credit cards are brilliant. They benefit from every value-add that is possible with a credit card.”
Smart credit card use can bring up your credit rating, enrich your lifestyle, and even help you to build the life you want. Here are the top eight tips to get the most out of your credit card.
Credit card debt grows more from the cost of borrowing money, rather than the actual cost of your purchases. To keep that debt from ballooning, be sure to pay off your credit card bills in full every time.
“A credit card is supposed to be an interest-free loan of whatever amount for 30 days,” says Birenbaum. Before you use it, ask yourself how much you can afford to pay off, she advises. “After 30 days, that amount should always be whatever is in your bank account.”
For bigger expenses that require repayment in instalments, think about what those payments will look like and whether you’ll be able to manage at your current card’s interest rate. It may be worth switching to one with a lower rate instead.
“You can’t really talk about credit cards without the idea of budgeting coming up,” says Laideen Dockery, founder and CEO of Laideen & Co. Financial Group, a boutique financial planning firm.
Many card holders assume they can pay for a purchase without having planned it, or without knowing where the payment will come out of their budget. “There’s a big disconnect between the actual purchase and understanding what it takes to pay something off,” she says.
Pay close attention to the numbers, she advises. Consider how much your monthly expenses actually cost, because “if you don’t understand your monthly finances, there will always be another purchase” you’ll think you can pay off.
Things you don't plan for pop up all the time – a last-minute dinner with a friend from out of town, an appliance that breaks down and needs immediate replacing. While it’s important to budget for our monthly expenses, it’s also wise to plan ahead for unexpected events and buys.
“Take an interest and be really honest with yourself in terms of non-monthly expenses,” says Dockery. If you’re not putting money away for them, you end up reaching for your credit card more.
Another handy tip of Dockery’s is to “never go over the 30% mark.” For example, if your credit limit is $1,000, you want to have a balance of $300 or below.
Keeping your credit card utilization rate below 30% is more than a practical way to keep debt from ballooning. “It shows that you have good management skills and that you’re not debt-dependent,” she says. Reaching your credit limit and maxing out on your credit card is the quickest way to damage your credit rating.
Many credit cards come with substantial incentives and rewards with frequent use, so it pays to know what they are and to take full advantage of them. “Review the card holder agreement. There may be benefits that the user is not taking advantage of,” says Birenbaum.
She adds that as our needs evolve, so should our credit card benefits. “For example, right now, airline points are not as in demand. So if your credit card perks don’t line up with where your life’s at in the moment, maybe it’s time to review which cards you use.”
Birenbaum also advises utilizing the points you’ve accumulated as soon as you can. “Companies can change the value of these points any time,” she says. “As things get more expensive every year, the value of your points diminishes. Those points are sitting there, not earning any interest.”
Lenders and credit card issuers will often want to expand your credit limit. The trick, says Birenbaum, is to learn to say ‘no.‘
“Even if you decide you don’t want more than $1,000 on your credit card, the bank is going to keep offering you more, regularly,” she says.
“It comes back to discipline. You have to be able to say ‘no, thank you.’ You have to be prepared to say ‘no’, and know why you’re saying ‘no’.”
Ultimately, credit cards are not free money. Though they let you enjoy things in an instant, you still have to pay for them eventually; what they really let you buy is the ability to enjoy something now. “Use credit cards as a convenience tool, not as a form of credit,” advises Birenbaum.
If you’re struggling to get your credit card spending under control, it may be time to seek help.
“I always suggest having an accountability group where you’re able to discuss your finances,” says Dockery, who recommends reaching out to trustworthy family members or friends. “It’s always good to try to communicate where you stand with your debt, and what your financial or debt goals are.”
There are also non-profit organizations like Credit Counselling Canada that offer advice on debt repayment and financial literacy education.
If approaching a financial advisor feels a little daunting, consider starting with a money coach first.
“Many people shy away from financial advisors because they feel that you first need a certain level of wealth,” observes Dockery. “It’s about building wealth, so your starting point is where you are now. You’re going to need that assistance and accountability to move forward.”
Smart credit card use is a corner stone of financial responsibility. You need the financial awareness and discipline to use your credit card correctly.
Ultimately, smart credit card use is hard, but it's for you! After all, you're the one who reaps the benefits (and will have to pay off mounting bills if not!).
“You want different trade lines that can show lenders you are responsible with credit,” says Dockery. “The better you manage your credit line, the better interest rates you can get on things like your mortgage or loans.”
“It makes things cheaper for you in the long run.”