Credit cards. Can’t live with ’em, can’t live without ’em. (Well, actually you can; we just covered that topic here.) Either way, credit cards can be a convenience for some, and a hindrance to others. Whether your relationship with plastic falls into the use or abuse category, there’s one thing we all have in common: Questions! And we’re giving you the answers to some of the top questions we get about credit cards and how to use them to your advantage.
1. Are there advantages to using a credit card instead of cash?
Convenience aside, there are some advantages to using credit cards, mainly in the form of rewards, cashback offers, and building up a positive credit history—but this is only the case if credit cards are managed well. If they’re not, debt, interest, and late fees can add up and knock your credit score way down.
2. Is carrying a balance on my cards good for my credit score?
No. This myth persists because some people think that if they pay their credit card in full every month the credit card company will not report anything to credit bureaus, thus doing nothing to help boost their credit rating and credit score. So long as you pay after the billing cycle has ended (when you get your bill), your payment will be duly noted to agencies. And FYI: Regular payments trump carrying a balance every single time when it comes to increasing your score.
3. Should I cancel credit cards I no longer use?
Probably not, especially if you’re trying to boost your credit score. Credit history factors into your score, so an account you’ve had for a while is valuable in that it shows you have a credit history. Plus, if the card is paid off it can improve your credit card utilization ratio, showing that you have credit, but you aren't using all of it—and that’s a good thing.
4. What does APR mean and how does it work?
APR stands for annual percentage rate; it’s the price you pay for borrowing money (aka the interest rate on your credit cards), and it’s how most creditors make the bulk of their earnings. Although APR is expressed as an annual rate, credit card companies use this figure to calculate the interest charged daily, and then bill you monthly.
Confused yet? Think of it this way: To calculate how much interest you’ll pay each day you carry a balance, you can convert your APR to a daily percentage by dividing it by 365 (the number of days in a year, of course). At the end of each day, the credit card company multiplies the current balance on your account by the daily rate. That daily interest charge is then added to your balance the next day.
For example, let’s say you have a credit card with an APR of 12%. Your daily rate would be 0.032% (12% divided by 365). If the balance on your card today is $500, today’s daily interest charge would be $0.16 ($500 multiplied by 0.032%).
This $0.16 charge will occur daily (or grow if your balance grows) until the end of the monthly statement cycle.
5. Should I take advantage of a balance transfer offer?
Balance transfer cards let you move an existing debt to a new card, which will charge a lower interest rate or, in some cases, no interest at all. However, you generally have to pay a fee related to the amount of the balance you transfer (often 10%; so transfer $1000, pay $100). That may sound steep, but depending on the APR you’re paying on the other card, it may be worth it. Be sure to read all the fine print in order to decide if the move is right for you.
6. What is a cashback card?
Cashback cards are just credit cards that let you earn money back as you spend. The amount you earn will depend on the card you choose, and higher rates are often only offered during introductory periods. These type of cards are beneficial for those who use a credit card and pay it off regularly; otherwise, the small cashback amount is likely not going to offset the interest charges you pay monthly.
7. Is a prepaid card the same as a credit card?
No. Prepaid cards allow you to load a set amount of money onto a card, which can then be used like a credit card. Unlike a credit card, however, when the money's gone, it’s gone. The card will not work again until you reload it. The benefit of a prepaid card is that you can’t spend more than you can afford, and there are no late fees or interest charges because it’s your money.
8. How does a joint account work?
Many couples opt to hold joint accounts, with each person agreeing to take full responsibility for the debt incurred on the joint account. If the account is well maintained, it’s positive for both parties. However, if payments are late, it reflects negatively on both peoples' credit history. But joint accounts aren’t just for couples. Some parents will add their teenager to their credit card account, handing over a credit card long before their child understands the full responsibility of managing credit. Unfortunately, this can not only damage the parents’ credit, but also encourage negative credit and spending habits for the teen that can have a long-term impact on their goals, including future relationships.
9. Why do some cards have an annual fee?
Cards with an annual fee often partner with service providers, like airlines, hotels and retailers in order to offer discounts to their users. For those who fly frequently, stay overnight often, or just love to shop, the benefits of a card with an annual fee can far outweigh the annual fee itself. But for those of us not regularly engaging in the lux life, cards without an annual fee probably make the most sense.
10. What happens if I can’t pay my bill?
Since a credit card lends money, you don’t have to pay off the entire balance all at once. But keeping a balance on your card means you're being charged interest, which we all know adds up quickly. Stop paying it altogether, and you can count on relentless collection calls and you might even be taken to court.
But rest assured, we're here for you! Our country’s “borrowing binge” is taking its toll, causing both mental and physical anguish. If you’re in a financial hole—sleepless nights, arguments with a partner, incessant collection calls—debt consolidation might be the answer.
Want to learn more? Contact us today to set you up with a free counselling session with one of our stellar non-profit, certified credit counsellors. During your appointment, they'll complete a free Debt Assessment to go over all of your options for becoming debt-free.