How to choose and use credit cards

Using credit cards to your best advantage    

Having a credit card is a given for most Canadians today. And qualifying for one is easier than ever. But it’s just as easy to get into trouble when using them, if you’re not careful. It’s crucial to have a solid understanding of the advantages and hazards of credit cards.

If you want to binge shop on Amazon, book a hotel, rent a car, order takeout from an app, it’s virtually essential that you have a credit card. But choosing the right one for you can be daunting.

There is a dizzying array of options when selecting a card or evaluating the ones you already have. There are no fee cards, low-rate cards, cards for travelers, ones intended for students or those new to credit, and more! 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 what you should be mindful of when choosing – and using – any type of credit card.

Effective use of credit cards

We’ve all heard the horror stories of people getting so deeply in debt with their credit cards that their lives are dramatically affected. But credit cards can be an effective tool in managing your purchasing power and – when used wisely – can actually improve your credit score and your ability to get loans or mortgages when needed.

Credit cards are a universally acknowledged form of payment and are generally accepted everywhere. They are a mainstay of the travel industry and online shopping –the lack of a card can pose problems with everything from hotel reservations, to software subscriptions, to getting tickets to a concert.

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 attractive reward points and travel insurance, may come with higher interest rates 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 charges cancel out the value of the rewards you receive.

On the other hand, if you’re someone who pays your balance in full and promptly 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.

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.

Accelerate your rewards

Many cards now offer accelerator rewards points for various types of purchases such as groceries, entertainment, gas or travel. Look for a card that provides valuable points for the type of purchases you typically make with your card. And always carefully review the fine print regarding the value of redeemed rewards, not all cards offer the same cash value for points.

Before you apply, 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 partner. You want the buying power of the extra reward points you generate to outweigh the cost of ownership.

Five tips for credit card users

No matter the type of credit card you choose, 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 and not chase 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. Allowing balances to accumulate each month can also lead too easily to debt that becomes overwhelming. Consider setting up an automatic payment to pay off your full balance from your personal account each month.

3. Be fraud-aware

Take precautions to protect yourself from fraud and identity theft. Retain all your receipts (electronic or print) 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 or go paperless. And always cut up your card when it expires.

4. Monitor how deep you go into your credit limit

Constantly bumping up against your card 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 for a long time. 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, there may be 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 to 60 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. Credit inquiries from potential lenders are recorded on your profile and too many can indicate 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.