In honour of Financial Literacy month in Canada, we thought we’d offer a few tips on how you can take control of your credit card and make sure it doesn’t take control of you. This isn’t a get out of debt tip sheet, it’s a stay out of debt primer.
Today’s Canadian credit cards really serve three primary purposes, they offer credit, convenience and rewards. Unfortunately, whether we like it or not, every time we use our credit card for conveninece and rewards, we use its credit functionality as well.
But there are a few tactics that can help reduce the risk of credit cards, while allowing you to enjoy its benefits a little more worry free.
#1 The Golden Rule: Always Repay Your Card In Full At The End of The Month
With most credit cards, if you pay off the balance in full at the end of the month, you don’t pay any interest.
Doing so is easier said than done – that’s why there’s more than $80 billion of credit card debt owed by Canadians!
Our Golden Rule of credit card use is to always pay your credit cards with Pre-Authorized Debit. You’ll have two options, to pay the minimum payment, or to pay the balance in full. Select to pay the balance in full.
Using pre-authorized debit will take away any risk of being late on your credit card, or of carrying a credit card balance. If you select the minimum payment, while you won’t be late, all you’ll be doing is paying the monthly minimum of 1% of your balance. All the while you’ll be growing your credit card debt, leaving 99% of your debt to accrue interest, and playing right into the hands of the credit card company. Paying the minimum is ideal for the credit card companies, it’s the worst possible outcome for you.
There are some downsides to using pre-authroized debit. For one, it means you have to have the funds available in your checking account, otherwise you’ll be paying an overdraft fee. Second, it means if you don’t check your credit card statements for unauthorized charges, you’ll be paying them down before launching a dispute – so make sure you check your statements before your automatic payment goes through.
#2 Draw The Line
Assuming you have good credit, banks will provide you with the largest credit line they can. They do this because the higher the line, the more you’ll spend, the more you spend the more income they earn from interchange, and the more interest income they’ll earn from higher revolving balances.
While Canadian banks are now required to get your express consent before each credit line increase, the rule has created an unintended consequence. Banks are issuing higher lines to start than ever before, out of fear you won’t agree to one later on.
As a result, it’s up to you to call the bank and put a cap on your credit line. Now some may argue that you shouldn’t carry a balance higher than 30% of your credit line, lest your credit score go down. But remember, you’re going to pay down your balance at the end of the month. Moreover, there’s no need to play into the narrative the banks and credit bureaus (who’s clients are the banks), have created to compel you to take out more credit than you need. Remember the credit score is an indication of how profitable you are to the banks, now only how good a credit risk you are.
#3 Exit On A High Note
Don’t be afraid to cancel your credit card. We always recommend keeping at least two credit cards in your wallet from different banks. However, if you signed-up for even more cards to get your Aeroplan Bonus, or Air Miles Welcome Offer, but have no intention of using them thereafter, cancel them. That means calling up the credit card company and actually closing the account, not just cutting up your card and throwing it in the garbage.
There are two good reasons to do so. First, for the same reason as reducing your credit line, it will keep temptation at bay. Nothing good comes from keeping cake in t
he fridge, if you’re on a low sugar diet. Same with too much credit. Out of site, out of mind. If you don’t have too much line, you can’t use too much credit, and get into too much trouble.
Second, it will allow you to get the next big credit card welcome bonus offer when it becomes available – you won’t be declined because of too much contingent liability. You see, when a bank wants to extend you credit, they look at all of the available credit you have on file. If they see you have too much credit, relative to your income, they are either going to decline you, or give you a really small line.
So there you have it. A few tidbits on how to put a little ring of discipline around your credit card. We love credit cards for their convenience and rewards. We also think that credit cards, especially low interest credit cards, can serve a purpose as a credit facility for unexpected expenses. But there are 80 billion reasons to make sure your credit card doesn’t tempt you into spending more than you have, just because you can.