How to be a responsible credit card user

The ins and outs of credit cards and how to safely use them as the asset they can be  

Credit cards are a popular and convenient form of credit that can be a very useful tool. Often one of the first forms of credit used by a new borrower to establish a credit history, credit cards can protect purchases, help users earn points and cash back, and give access to the world of online retail. 

But convenience can come with a cost. Responsible credit card usage doesn’t come standard and understanding the implications of borrowing is key to establishing and maintaining good credit and building a successful financial future. 

The costs of borrowing  

Today, credit cards are a necessity – whether they’re used for building credit or for big purchases you need more time to pay down, the convenience and flexibility they offer is unmatched. However, high interest rates and growing debt can create an uncomfortable and difficult situation if left unchecked.

To better understand how to be a responsible credit card user, there are a few things to know.

When it comes to credit card balances, there are two main components to the cost of borrowing: principal amount and interest.  

• Principal amount: The amount you actually spend or borrow when you use your credit card.
• Interest: The cost of borrowing, or the amount you pay to the lender, based on the outstanding balance. If you don’t pay your balance in full each month, your credit card issuer will charge an interest fee. Annual Percentage Rate (APR) is a standardized way of calculating interest.

Additional fees and costs can vary depending on the institution and type of card you have. Some to educate yourself on include:

• Annual fees
• Cash advances
• Foreign exchange rates and fees
• Overlimit fee
• Insurance
• NSF or dishonoured payment fees
• Inactive account fees

Comparing credit products

Different credit cards have different interest rates, fees, and benefits. Comparing credit cards is key to finding the right fit for you based on your needs and ability to repay your balance and interest.

This free credit card comparison tool from the Financial Consumer Agency of Canada can be helpful in finding the right fit for you.

Factors to consider when choosing a credit card

Your credit history

• If you have poor credit or no credit, you may have fewer options when applying for a credit card. You may have to start with a secured or prepaid card to build your credit.
• If you have good credit, you will have more products to choose from so it’s important to choose one that suits your goals.
• Are you hoping to build or improve your credit rating so you can qualify for other credit products in the future? Certain cards are geared towards credit building and repair.
• Review your credit report before applying for credit cards using a free site such as Equifax or TransUnion. Ensure there are no errors in the report that may be negatively impacting your credit score.
• Consider checking your credit report every six months, alternating between sites so you can detect any potential problems as soon as they arise.

Intentions for using the card

• Emergencies
  • If you only plan to use the card for emergencies you may prefer a low-balance, no-fee credit card. Having an emergency fund saved is preferable to using a credit card for emergencies but if you must use credit, it can be a convenient option.
• Security
  • Carrying cash may not always be a safe option so having a credit card to use is more secure. If your card gets lost or stolen, you can cancel it immediately.
• Large purchases
  • Some cards offer purchase insurance against loss, theft, or damage which can make larger purchases more beneficial due to the increased insurance coverage. Additionally, some vendors will not allow you to pay for the whole purchase or they may charge merchant surcharges, which are fees in addition to the interest already charged by your credit card company.
• Daily purchases
  • If you are paying off your card’s balance each month, using a credit card for daily purchases may be useful if you’re collecting points, getting discounted services, or receiving cash back.
• Bill payments
  • Automatic bill payments can be made with credit cards, which can be a convenient way to pay bills by scheduling payments to be made automatically on or before their due date.
• Travel
  • It is very common for companies to require a credit card to reserve a car rental or hotel or book a flight.
• Merchant rewards
  • Some card issuers offer rewards or points to be used at specific vendors for things like travel points or discounts at retailers.

Protecting yourself from fraud

If someone steals your credit card, or gains access to your personal information, they may incur charges on your account without your knowledge. Monitoring your banking statements and credit report regularly is the best way to ensure no unauthorized transactions or fraud are taking place. If you see unusual or unauthorized activity on your credit statement or report, immediately notify the Canada Anti-Fraud Centre.

Here are some tips for protecting yourself from credit card fraud:

• Never share your PIN or online password, not even with family.
• Don’t write your PIN down.
• Don’t save your PIN on your phone or computer.
• Change your PIN often.
• Don’t use the same PIN on multiple cards.
• Shred your credit card statements or get your statements online.
• Always keep your card safe and in your sight when making purchases.
• Use firewalls, anti-virus protection, and anti-spyware on your computer if you are storing or accessing financial information on any of your devices.
• Don’t give your credit card number over email.
• Log out of banking sites as soon as you are done using them.
• Don’t use public WIFI to access your online banking or for online shopping.
• Never lend your card to anyone.

Avoid paying interest

Making your payments on time and in full is key to avoiding unnecessary interest charges.

If you pay by phone, online, or by pre-authorized debit, your card issuer may not process the payment on the same day as you make the payment.

If you cannot pay your balance in full, it’s best to pay at least the minimum amount to cut down on the interest charges you’ll incur.

Consequences for late payments or for not making the minimum payment may include:

• Interest charges
• Late fees
• Increased interest rates
• Cancellation of credit card balance insurance
• Negative credit reporting
• Cancellation of your card

If your credit card payment is due on a weekend or statutory holiday, you can typically pay it the following business day and it will be counted as paid on time.

It’s important to note that by only paying the minimum balance on your card, it will take you longer to pay off your balance and you will end up paying more interest.

If you’ve taken any cash advances on your credit card, you will pay a higher interest rate on cash advance transactions. Review your statement carefully so you understand the minimum payment required.

Additionally, review the cardholder agreement to find out when your card issuer processes different payment methods to avoid any unnecessary interest or late fees.

What to do if you have trouble paying off your credit card

If you are struggling to pay your credit card balance in full each month, it’s a good idea to revisit your budget and spending habits. Try making payments more frequently, on every payday, rather than once a month and reduce spending on the card until you’ve paid the balance down.

If your credit card debt is unmanageable, consider taking to a Licensed Insolvency Trustee about your options to help you say goodbye to overwhelming debt and hello to financial freedom.