How to Choose – and Use – Credit Cards to Their Best Advantage
No matter the type of card you prefer, it pays to use it sensibly.
Canadians continue to have a love affair with their plastic and with upwards of 72% of Canadians now shopping online, people are using their credit cards more than ever before. Which is why it is crucial to have a solid understanding of their advantages and hazards.
Sorting through the dizzying array of options when shopping for a card or evaluating the ones you've already got can be daunting. You’ll find low-rate cards, cards for travelers and ones designed 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.
Effective use of credit cards
We’ve all heard the horror stories of people getting so deeply in debt with their credit cards, their lives are dramatically affected. But credit cards can be an effective tool in managing your purchasing power and ability to get loans and mortgages through their effect on your credit score.
Credit cards are a universally acknowledged form of payment and are generally accepted everywhere. They are a mainstay of the travel industry and the lack of a card can pose problems with reservations and foreign exchange conversions.
Finding the right fit
When sizing up credit cards, there are typically trade-offs between interest rates, annual fees, reward points and other benefits. Which will suit you best generally depends on your lifestyle, how you use it, and how you pay off your balance.
Premium credit cards with all their perks such as double reward points and travel insurance, often come with higher interest rates and/or annual fees. 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 pays your balance in full every month, the interest rate won’t be an issue and you can factor in other features.
Are you a traveler? Consider a card that lets you accumulate reward points to use on flights, hotels, cruises, day trips and other travel-related services. Look for emergency medical coverage, as well as protection for car rental, trip cancellation, trip interruption and baggage loss.
If it’s more about saving on your daily expenses, a cash back card could fit the bill. Like to shop? Some cards offer a broad selection of brand-name merchandise and gift certificates as rewards.
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.
Many of our cards even offer reward redemption flexibility, which allows you to accumulate both rewards for travel, merchandise, gift cards, event packages as well as cash back on purchases.
Another valuable benefit provided by some cards 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?
Standard rewards program offer 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 you apply; however, 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 perhaps. You want the buying power of the extra reward points you generate to outweigh the cost of ownership.
Five tips for credit card owners
No matter the type of credit card you have, it pays to use it sensibly. Here are five tips to consider:
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. And allowing balances to accumulate each month can lead too easily to debt that becomes overwhelming.
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.
Don’t overlook the fine print
It’s in the fine print where you’ll uncover restrictions, exclusions or hidden costs which can water down the value of rewards. For example, blackout periods that restrict when you can redeem your reward points for trips.
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 once you’re over 65.
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. Research shows that many consumers don’t know their points balance and more than a quarter have never redeemed points.
Piling up points over years isn’t necessarily the best strategy. Like cash, points tend to devalue over time as rewards programs update their offering and their purchasing power diminishes as prices increase. Consider using your points regularly, perhaps setting a goal for something specific each year.
About your credit score
Most credit scores are based on the following factors:
- Payment History – 35%
- Credit Utilization Ratio – 30%
- Types of Credit – 10%
- New Loans – 10%
- Length of Credit History – 15%
Credit card companies and other lenders look to the credit score to determine whether you’re a safe bet to lend to. While it’s normal and expected to seek credit occasionally, be careful you don’t overdo it. You’re your potential lender’s inquiries are usually recorded on your credit file and reviewers might assume this indicates that you are urgently seeking more credit or living beyond your means. These Hard Hits will also reduce your credit score. But there’s an upside to having a few cards and keeping them “healthy” as they will help you build a positive resume of credit success.
Need help? Smart advice is here
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.