Credit cards can be a great tool in your financial life, but you need to read and understand the directions first before you start using them. So often I hear about how someone was advised to get a credit card to start building their credit history, but then realized too late they didn’t know how to manage it properly, and the misuse ends up hurting their credit score as a result.
The Basics of Using a Credit Card
To make the best use of your credit card(s) and avoid costly mistakes, take the time to review your monthly statement and understand what everything means. There is more to your statement than just the balance, minimum payment and the due date (although these are very important details). Have you recently read and reviewed your monthly credit card statement? Or do you regularly check your balance online and make the requested payment? The following will help you better understand your credit card and how to use it properly.
The 411 on Credit Card Interest Rates
Your monthly credit card statement will show you the annual (and possibly the daily) interest rate for your purchases, as well as cash advances. It's not unusual for the interest rate to be higher for cash advances than purchases (my statements show a 3 percent difference). If you find yourself carrying a balance month to month, the lower the interest rate is, the less you will have to repay. You can check with your credit card provider to see if you qualify for a lower interest rate credit card.
Your Credit Limit and Available Credit
Your monthly statement will tell you your credit limit and your available credit. This will help you monitor how close you are to your limit and if you should maybe put your credit card on ice for a little while. Your credit score is negatively impacted the closer you get to your credit limit. Also be aware that if you go over your credit limit, you will likely be charged a monthly over-the-limit fee until you can get your balance below your credit limit once again.
Review Activity Description
It is very important to review every transaction on your statement to make sure it’s correct. Check to make sure you made the purchase, that the dollar amount you were charged is correct, and that there are no double transactions. You can do this by comparing your credit card receipts with the transactions listed. Any errors or disputes need to be reported within 30 days of the statement date or the credit card company will consider the statement to be final. It's also important to notify the credit card company immediately if your card is ever lost, stolen or used without your permission to avoid being liable for the charges.
The Facts About Minimum Payment Due
To maintain a good credit history and credit score, you need to pay at least the minimum payment every month by the due date. This payment is clearly shown on the first page of your statement, often in bold print. Depending on your credit card company, the statement might look a little different. For example, my MasterCard statement explains how they calculate my minimum payment, whereas my Visa statement doesn’t. Always keep your cardholder agreement handy because you may have to refer to it from time to time.
You can also pay more than the minimum payment, and you should, so you pay less in interest charges. But just because you paid more than the minimum payment one month doesn’t mean you get to skip a payment next month. A payment is due every single month, whether you’re paying the balance off in full or making just the minimum payment. So if your minimum payment one month is $50 but you pay $100, you will still have to pay your minimum payment next month.
What Happens If I Only Pay the Minimum Payment?
Some people think that as long as they're making their minimum payment, they won’t get into trouble or be charged interest. While making your minimum payment on time every single month helps your credit rating and credit score, just making the minimum payment doesn’t help decrease your total debt. Anything you haven’t paid off in full on your credit card will accumulate interest. With credit card interest rates at around 20 percent, even a balance of a few hundred bucks can easily swell into the thousands if you just make the minimum payment and continue to add new charges to the card. At Credit Canada, we see many clients who are great at making their minimum payments on time, but they never see their debt balances go down.
Paying the Full Balance Every Month
I’m always surprised when I hear people say they thought they could only make the minimum payment due. As previously mentioned, you need to make the minimum payment to protect your credit rating, but you can pay any amount between the minimum and the full balance. By paying the balance in full by the due date, you won’t be charged interest (unless you took a cash advance). If you did this, essentially you would be using the credit card provider’s money for approximately one month at no charge to you.
Payment Due Date
Your payment due date is also clearly shown on your monthly statement. It’s approximately 21 days from your statement date. It is very important to understand that your payment must be received and posted to your account by the due date. That’s why you should make your payment at least 2 to 3 business days before the due date, so that it's posted on time. Making your payment even a day or two after the due date will negatively impact your credit rating and your credit score.
Estimated Time to Pay Off Your Balance
When reviewing your credit card statement, you will see a note stating how long it will take to pay off your credit card balance if you only make the minimum monthly payment. (Sometimes this note is at the very bottom or back of your statement.) If you want some incentive to pay more than the minimum payment, I'll give you an example: On a balance of $1071.22 with a minimum payment of $10.00 a month, it would take 9 years and 5 months to clear the balance—and that’s assuming you’re not using the card for new purchases!
Contact Credit Canada for Help with Your Credit Card Debt
Our Debt Calculator can show you how much money you could save in interest using different repayment strategies and adjusting your monthly payments. You could also use our Budget Calculator to see how cutting down on a few everyday expenses can free up money to clear your debts quicker. And if you simply don’t know where to start, you can book a free one-on-one counselling session with one of our certified Credit Counsellors by calling 1.800.267.2272. This could be the first step to resolving your credit card debt for good!