Credit Cards: The Good, and The Not-So-Good

Do you remember signing up for your first credit card? I do. It was at Queen’s University during frosh week. I was walking around campus, checking out all of the little booths they had set up for newbie students, and I got sucked in. And all I got was a crappy oversized t-shirt and a $10,000 credit card limit. WHAT KIND OF 19-YEAR-OLD NEEDS A $10,000 CREDIT CARD LIMIT?

Luckily, I was educated by my parents about how credit cards worked and didn’t take advantage of this $10,000 limit. I knew that this money was not “free”. Some other friends’ in her life did not understand how they worked and got caught up in a bit of credit card debt.

So for all of you readers who may have never thought about that little piece of plastic that sits up front and centre in your wallet, this post is for you.

THE ANATOMY OF A CARD:

This is a basic overview for those of you who may not know what all of those numbers are on your card.

HOW CREDIT CARDS WORK:

  • When you use a credit card, you are borrowing money from the issuing company/bank.
  • The issuing company/bank (generally) gives you an interest-free grace period (found in the terms and conditions) to pay off the full amount that you charged to your card. After your interest-free grace period is up, you’re charged interest (often around 20-30% which is crazy high!).
  • If you are unable to pay the full balance, you need to at least pay the Minimum Payment Amount by the due date (found on your credit card statement). This will ensure that you keep a good credit rating and dodge any late fees.
  • Heads up though! Have you noticed that your Minimum Payment Amount is always kept relatively low compared to your overall balance? This is because credit card companies make money by charging you interest on your leftover balance. That’s why it’s beneficial to pay off as much as you can!

THE GOOD

  • Can be used almost everywhere (in-store, online, over the phone etc).
  • Some offer a cash-back or points incentive to use them.
  • Useful in emergencies such as job loss, car repair, or unexpected healthcare costs.
  • Help raise your credit score when you pay off the balance, or at least the Minimum Payment Amount.
  • Some have insurance attached to them, which will cover lost, stolen, or damaged goods that were purchased on your card up until a certain date. Some even have travel insurance when you purchase trips on your card. Check your terms and conditions as to what this insurance will cover.
  • Your expenses are recorded, hopefully helping you to monitor your financial activity.

THE NOT-SO-GOOD

  • The annual fee. If your credit card charges $150/year, and gives you 1% cash back or the equivalent in flyer miles, you would have to spend $15,000+/year to have the annual fee pay for itself! There are credit cards out there that have no annual fee but still give you reward points.
  • The interest rates. Credit cards are some of the highest loan options in Canada with interest rates up to 30% (read the fine print).
  • With new features like “tap”, it’s now easier than ever to pay for things without thinking twice about it.
  • Late fees. If you can’t pay the Minimum Payment Amount, you’ll probably be charged a flat rate late fee on top of an annual interest rate increase. Your credit score will also drop if you don’t the minimum payment amount.
  • There’s a lot of fraudulent activity going on with credit cards. Make sure to check your statement every month to ensure everything is smooth sailing.

the budget babes hot tips:

  • Keep your limit low. If you don’t have $1000 sitting in your account, you probably shouldn’t have a $5000 limit to max out. Paying off $4000 with a 20%+ interest rate will not be an enjoyable process. When your credit card company offers you a limit increase (which they will at some point), think about what you can afford. It’s okay to say, “No, thank you!”. Bigger is not always better.
  • Keep a record of your spending by creating a budget and using a budget tracker to track your creidt card usage. I use my credit card for everything so I can maximize the points and cash back. But I also pay it off after every month. I hate carrying debt.
  • Reduce credit card interest charges by paying off more than the minimum amount. Or even better – pay it all off in full if you can!
  • Read the terms and conditions of every credit card. This is where they will explain your interest rates, what to do if your card is lost or stolen, the interest-free grace period, and any annual/other fees that you may not be aware of.

So, there you have it. The breakdown of the credit card. If you find yourself struggling to get yourself out of debt, and need some one-on-one money love, contact me!

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