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  • Managing Credit Cards: A How-To Guide

    Managing Credit Cards: A How-To Guide

    by:
    Sandra Sherk

    Everyone knows how credit cards work—so why do so many people misuse them? Knowing how to use them to your advantage starts with learning some simple fundamentals about credit cards, which no one ever seems to tell us, like understanding that a credit card doesn’t increase the amount of money you have available. Rather, it simply lends you a set amount of money to pay for goods and services that you must eventually pay back. And if you don’t use your credit card wisely, you could end up building up debt, paying high interest charges, and hurting your credit score.

    By following this helpful How-To Guide you can avoid many of the financial pitfalls commonly associated with credit cards.

    Types of Credit Cards

    The key differences between credit cards are the interest rates, fees, rewards, and benefits. Understand the terms and conditions before you apply for the credit card. You may also want to check your credit report to make sure there aren’t any “surprises” that will affect your ability to get a card.

    Understanding Interest Rates

    If you carry a balance from month-to-month, interest rates are very important to you; the higher the interest rate, the more you will need to repay. However, if you clear the balance in full every month, this rate won’t be as important to you as fees or the benefits and rewards. Compare carefully—even with a fee the lower interest rate can be to your advantage.

    Sizing Up Introductory Offers

    Beware of offers with a low interest rate—and be sure to read the details carefully to see if there are exceptions. Will the interest rate go up if you go over the limit or make late payments? Does the low rate cover cash advances? You know the old saying, “if it seems too good to be true, it probably is.”

    Assessing Fees

    It is important to compare credit card fees. Some have no fee, while others may charge a monthly or annual fee. Next, weigh the advantages and disadvantages. While you may assume a no-fee card is your best bet, it’s possible that a card with a fee could have benefits that outweigh it. For example, a card could charge an annual fee but offer travel and cancellation insurance that outweighs the fee even if you take just one trip per year.

    You also need to be aware of other fees credit cards may charge, and assess how they could affect you depending on how you plan to use the card. Remember, these charges all add up!

    • Cash advance fees, which can get costly if you plan to hit the ATM often
    • Overlimit fees, which can become expensive if you typically spend more than allotted  
    • Service or “convenience” fees, applied to certain types of transactions
    • Foreign country fees, an important consideration for frequent travellers

    Reaping Rewards

    Everyone likes to be rewarded, and rewards cards are a great way to earn them. However, carrying a balance decreases the value of the rewards or benefits because now you’re paying interest. To make the most of the rewards and benefits, try to clear the balance every month.

    You’ll also want to consider how likely you are to use the reward or benefits, how long it will take to accumulate the needed amount, and whether the annual fee will be greater than the points earned.

    Making Monthly Payments

    If you carry a credit card balance, it is important to always remember to make your payments on time. Missing a payment or paying late can result in an interest rate hike (often a significant one), a blow to your credit score, and potential card cancellation.

    While it can be tempting to just make the minimum payment, try to pay above it. This will help you chip away at the overall balance rather than simply covering monthly finance charges.

    Checking Statements

    Despite what the game Monopoly has taught us, bank errors are rarely in our favor. Check your credit card statements each month for any errors, and be sure to report any unauthorized transactions to the issuer; they must investigate a disputed transaction and in most cases you are not responsible for transactions you didn’t make or approve. If you lose your card, notify the issuer immediately.

    Preventing Fraud

    Protecting your card and personal information is the best way to prevent credit card fraud. Three steps to take to ensure you don’t become a victim:

    • Make sure your card is returned to you after every transaction
    • Limit the number of credit cards you carry with you
    • Keep your Personal Identification Number (PIN) a secret, make sure it is difficult to guess (your birthday is a definite no-no) and change it often

    Shopping Online

    The internet has changed the way Canadians shop, but be careful when taking to the web. Use trusted and secure websites and look for sites that with addresses starting with “https” or ones that have a padlock image on the address bar. And never give out your credit card information in an email—it’s not secure.

    If you find yourself running into difficulties with your credit card payments you should:

    And finally, don’t hesitate to ask for help. Certified credit counsellors will explore your options, and will work with you to help you achieve a debt-free life!

    Suffering From a Holiday Debt Hangover

    Topics: Credit Cards

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