Let's Talk: Credit Cards

Me: Credit cards are one of the best financial products to have ever been created.
People opposed to credit cards: Now hold on just one second. That's a pretty bold statement. Growing up, I've heard stories of people telling me to stay away from credit cards all the time. They can't be wrong!

I feel like there's a lot of misunderstanding around credit cards. Yes, in some circumstances, you should not be using credit cards because it would make your financial life more difficult than it needs to be. I too have grown up hearing these stories and have seen people in debt and how it affects them. However, if you understand how to use a credit card properly, you should be just fine and your bank account will thank you.

How Credit Cards Work

Let's start off with understanding what is a credit card. Credit cards are similar to debit cards in exactly every way except how you use the funds to make a purchase. Debit cards use cash from your bank account, whereas credit cards allow you to make a purchase through credit. When you buy using a credit card, you are essentially buying with money you don't have and saying, 'I'll pay it later'.

In addition, credit cards are one of the ways you can build your credit score. If you can build a solid history of borrowing funds and then being able to pay them on time, you'll build yourself a great credit rating. Credit cards are also a product you need to qualify for. If your score is low or you don't have a score, you may not qualify or may be given a secured credit card. This just means that you may need to provide something of value, like money as collateral. If you can't pay off your credit card, then your lender takes the money to cover your credit card balance. Alternatively, if you have an unsecured credit card, you don't need to provide any collateral.

When travelling, you should contact your credit card issuer so your card isn't flagged and blocked for suspicious transactions. You should let them know where you're going and an approximate time period you'll be out of the country. If you ever lose or have your card stolen, be sure to inform them as well. Unlike a debit card, you cannot get it re-issued to you at a branch. You will have to wait for it to arrive in the mail. In addition, fraudulent purchases made with your PIN code will not be reimbursed. Keep your PIN code safe and secure and try to cover your fingers when inputting it.

If you have a negative balance on your credit card, it simply means that you either received a credit or you overpaid your credit card. This means for your next purchase, your total will be reduced by the credit amount you have in your credit card. This happens all the time and there's nothing to worry about. Alternatively, your credit card balance may sometimes show a negative number as well. Keep in mind that it may take a few business days to process your transactions so don't go freaking out when you see this.

Your credit card has something called a 'Disclosure Statement' that you should understand. I'll highlight the main points:

• Limit - What is the limit on your credit card?
• Interest Rate - What is the annual rate of your credit card? Most typically fall around 20%. This is the most important reason why credit cards are dangerous if you don't understand it. Your interest will grow very quickly.
• Interest-Free Grace Period - When you make a purchase, how long can you wait to pay off your balance before it accrues interest? This is usually 21 days but may be different for your card.
• Minimum Payment - What is the minimum payment required when your credit card is due?
• Annual Fees - Does your credit card charge an annual fee to keep it?
• Foreign Fees - When spending other than CAD, how much is charged?
• Other Fees - What are the fees for cash advances, balance transfers, etc?

Types of Credit Cards 

These are the most common types of credit cards. You should choose a card that best fits your spending habits. They may come with extra perks like purchase protection or travel insurance. Some cards are tiered and you may need to meet a minimum credit score and income requirement to qualify.

• Regular - These are for people starting to build credit. They offer no extra benefits.
• Student/No-Fee - Similar to regular, they are meant to help build credit. They may or may not offer benefits.
• Cashback - You get money back for using your credit card.
• Travel - You get points for using your card, which can then be redeemed for flights.
• Low-Interest - This is ideal for paying off debt because you get a lower interest rate on your card.
• Points - You get points for your card, which can be redeemed for prizes or experiences.
• USD/Foreign - This is ideal if you shop outside of Canada very often. You can avoid the conversion fee.

Recap

If you understand how your credit card works and choose a card that best fits your needs, then you can build a great credit score, acquire free points or cashback and avoid paying any interest. If you don't understand how it works, then you'll have a lower credit score and pay A LOT in interest. You will still get points for using your card but you'll be accumulating interest faster than the points acquired. 

I hope you found this one especially useful!