Credit Cards: Sizing Up Your Options
The right one should fit your life like a glove.
We have a love affair with plastic. In 2016 there were over 75 million Visa and Mastercard credit cards circulating in Canada – that’s two for every person. But this figure doesn’t begin to capture the dizzying array of options you have when shopping for a card or evaluating the ones you've got.
You’ll find low-rate cards, cards for travelers and designs for students. Want emergency health insurance for when you cross the border? You can find it. Prefer cash back on what you spend? There’s that too.
Here’s how to cut through the clutter so you can make a choice that suits you best.
Finding the right fit
When sizing up credit cards, normally there are trade-offs between interest rates charged, annual fees (if any), reward points and other benefits. Which will fit you generally boils down to your lifestyle and how you spend.
Premium reward credit cards with all the perks often come with higher interest rates and/or annual fees. That’s why if you routinely carry a monthly balance, it can be better to choose a card that features a low rate. Otherwise, you may find interest cancels out the value of the rewards you receive.
On the other hand, if you’re someone who settles your credit card balance in full every month, your focus can fall squarely on comparing everything else.
Are you a traveler? You’ll want a card which lets you accumulate reward points to use on flights, hotels, cruises, day trips and other travel-related services. Look for extras like out-of-province/out-of-country emergency medical coverage, as well as protection for car rental, trip cancellation, trip interruption and baggage.
If it’s more about saving on your daily expenses, a cash back card could fit the bill. Like to shop? Pay attention to cards offering a broad selection of brand-name merchandise and gift certificates.
At the same time, ask yourself if you have another way to tap into the same benefits a credit card delivers. For example, health benefits from your card might not matter as much if you already carry travel medical coverage through a group policy at work.
Another valuable benefit is purchase protection against loss, theft or damage; as well as extended warranty by up to one year.
Will it be 1-for-1 or 2-for-1?
Having rewards is great, but not if it takes you forever to accumulate points.
A standard rewards program might offer you one point for every dollar you spend. But, assuming you qualify, it can be smart to upgrade to a premium card which will help you build reward points much faster, say, two points per dollar spent.
Before doing anything, estimate how much you’ll purchase using your card. It’s not unusual for a premium rewards card to charge an annual fee of $100 or more, plus fees for supplemental cards for a spouse or adult children. You want the buying power of the extra reward points you generate to outweigh the costs of ownership.
Don’t overlook the fine print
A card’s benefits might seem attractive, yet seeing the full picture often requires digging below the surface. It’s in the fine print where you’ll uncover restrictions, exclusions or hidden costs which can water down the value of rewards.
One example? Blackout periods when you can’t redeem your reward points for trips. So, if you’re a globetrotter, look for a card that offers unrestricted travel.
Is there a limit to the number of points you can collect? Do they expire? How do fees and charges work on cash advances or when using your card abroad? What’s the penalty if you miss a payment? Understanding the details can help you avoid unpleasant surprises.
Emergency travel medical coverage is a key benefit found in premium cards, but one that can be hard to decipher. Read the policy to determine the maximum number of consecutive days you’re covered while away. If you’re under age 60, you might find protection going out 30 or 48 days, for example. That said, expect that number to drop dramatically once you’re over 65.
Pre-existing medical conditions can be especially tricky. Normally a health condition must be stable for an extended period before you travel, typically anywhere from six to twelve months, depending on the policy. Even then, odds are you won’t be insured if the reason for your venture is to participate in extreme sports or undergo elective surgery.
Managing your rewards
Finding the right credit card is half the challenge. The other half is getting the most out of it. If it’s a rewards card that appeals to you, it’s crucial you manage your points effectively. That’s something too few of us do.
Research reported by the Canadian Bankers Association reveals 72% of people hold at least one credit card that carries rewards. For 82% rewards are a priority when shopping for a card. Yet, Bond Brand Loyalty’s 2017 survey of loyalty program participants in Canada and the US found most didn’t know their points balance, and more than a quarter had never redeemed points.
Ignorance and inattention can lead you to pile up points. The trouble is, like cash, points tend to devalue over time as rewards programs update their offering. That’s why it’s important to get in the habit of using your points regularly. Try setting a goal to save for, whether it’s a trip far from home or something simple like a kitchen gadget. Also, know if, and when, your points expire, and how they translate to dollar value.
By understanding what you have, you’ll be better positioned to take full advantage of your credit card’s benefits.
Debit or Credit?
Which is better – debit or credit? Each is a convenient substitute for cash and cheques. Both offer reimbursement for unauthorized activity on your account. What might tip the scales is how disciplined you are with your spending.
With debit cards, you pay immediately from the funds you have available through your chequing or savings account, making it tougher to overspend. And, with the right banking plan, you can minimize transaction costs. With credit cards, it’s easier to get into trouble. If you exceed your credit limit, are late making payments or don’t pay your balance in full when due, anticipate some combination of fees, penalties, or interest charges to apply.
Still, in responsible hands, credit cards have a lot of upside. For one, their reward options aren’t easily found in debit cards. As you manage credit wisely you build a positive credit history which helps you borrow money more easily and at lower rates. Plus, with a credit card you can pay later, giving you added flexibility in managing your cash flow.
Five rules of effective use
No matter the type of credit card you prefer, it pays to use it sensibly. Here are five rules to follow:
1. Don’t chase special offers. There’s no shortage of special offers to encourage you to switch credit card providers. While it may be a quick way to rack up perks, if your wallet becomes a revolving door of plastic, the steady stream of credit applications can be detrimental to your credit score. In the long run, it’s better to be loyal to a card that gives you the best value overall, not the deal-of-the-day.
2. Pay off your full balance every month. Paying your bills on time proves you can borrow responsibly, which helps keep your credit profile in tip-top shape. Paying interest, on the other hand, reduces the net benefit of the rewards you’re trying to earn. If you let your creditworthiness slip, you could encounter problems redeeming your points or even lose them outright.
3. Be fraud-aware. Take precautions to protect yourself from fraud and identity theft. Sign a new credit card as soon as you receive it. Retain all receipts and check them against your monthly credit card statements or your online account. Be sure to report any errors or suspicious transactions immediately.
Remember to keep your private information private. If you share your PIN or security code with anyone, you could be held liable for unauthorized charges. Don’t forget to destroy old statements and cut up your expired plastic.
4. Monitor how deep you go into your credit limit. Constantly bumping up against your monthly limit takes a toll on your credit score, so watch how much of your available credit you utilize each month. Under the right circumstances, raising your credit limit may actually help your borrowing status by lowering your utilization rate.
5. Don’t be in a hurry to cancel an older card. To a lender, the longer the credit history, the better, so it can be a mistake to close out a card account you’ve held onto forever. Doing so could also negatively impact your utilization rate by reducing your available credit.
Need help? Smart advice is here
If you need a little help finding the right card, our Credit Card Selector tool is a great place to start.
When you answer five simple questions, we’ll come up with recommendations for you from the new BlueShore Mastercard line-up. Whether it’s the premium World Mastercard, Travel Rewards, Cash Back or another choice entirely, we’re confident you’ll find a card that fits your life.
Want to learn more about your credit card options and how to get the most out of them? Your BlueShore Financial advisor is ready to lend a hand. Speak with us today.