Credit cards can be powerful financial tools when used responsibly. They offer convenience, delayed payments, security, and even rewards, but mismanaging credit can lead to credit card debt and financial stress. Yet when using your credit card, you’re borrowing money that you need to repay. It doesn’t actually increase the amount of money you have – if not used responsibly, you could accumulate debt, need to pay interest on your bill, and even damage your credit score. Everyone knows how incredibly easy it is to swipe a credit card when you are out shopping, or even by automatically entering your payment details while browsing online. Although many credit card companies offer special incentives to entice people to sign up for new cards with low or 0% APRs, these deals can be deceiving and many people fall victim to changes in terms and loopholes. In this article, we share how to use a credit card responsibly to ensure you maximize the benefits of using credit cards while avoiding the pitfalls they can bring.
How to use a credit card responsibly
Here are the steps we recommend taking to use a credit card responsibly and avoid accumulating credit card debt.
Understand your credit card terms
Before you start using your credit card, take the time to understand its terms and conditions. This includes:
- Interest rates: know the Annual Percentage Rate (APR) for purchases, balance transfers, and cash advances. This is essentially how much your credit card costs to use.
- Credit limit: be aware of your spending limit to avoid over-limit fees and potential credit score damage.
- Fees: familiarize yourself with any annual fees, late payment fees, and foreign transaction fees.
Create a budget
Creating a budget can help you to manage your spending and ensures you don’t charge more than you can afford to pay off. Here’s how to create an effective budget:
- Track your income and expenses: list all of your sources of income and fixed expenses (e.g. rent, utilities, groceries).
- Set spending limits: allocate a specific amount for discretionary spending and stick to it.
- Monitor regularly: review your budget periodically to adjust for changes in income or expenses. It’s a good idea to do this each month so you can ensure you’re staying on track and adjusting where needed.
Pay your balance in full
One of the most important rules for responsible credit card use is to pay your balance in full each month. This practice means you avoid interest charges, and by consistently paying your balance on time and in full, you demonstrate good credit behaviour and can improve your credit score.
Make your payments on time
Timely payments are crucial for maintaining a good credit score and avoiding late fees. To ensure you never miss a payment, we recommend setting up alerts (many credit card issuers offer reminders via email or text), and also automating payments for at least the minimum amount due each month.
Use credit cards for needs, not wants
Differentiate between needs and wants when using your credit card. Prioritize essential expenses, such as groceries and utility bills, over non-essential purchases like dining out or luxury items to avoid accumulating debt you can’t afford to repay.
Keep your credit utilization low
Credit utilization is the ratio of your credit card balances to your credit limits. Aim to keep your utilization below 30% to maintain a healthy credit score. If, for example, your credit limit is $1,000, try to keep your balance under $300.
Review your statements regularly
Regularly reviewing your credit card statements helps you to:
- Catch errors: identify and dispute any unauthorized or incorrect charges promptly.
- Track your spending: monitor where your money is going and adjust your budget if necessary.
- Stay informed: keep track of any changes to your credit card terms or fees.
Take advantage of rewards wisely
If your credit card offers rewards, use them strategically:
- Earn points: use your credit card for regular expenses like groceries and gas to earn points or cashback.
- Redeem smartly: use rewards for essential items or experiences that fit within your budget.
- Avoid overspending: don’t buy unnecessary items just to earn rewards.
Avoid applying for a credit card you’re unlikely be approved for
It’s easy to be tempted by new promotional offers or favourable interest rates that are often advertised for new credit cards. In fact, many of these rewards or deals are intended for those with good credit and high incomes, and those who will use their credit cards frequently. We all have a good idea of our financial situation, and the products we will likely or will not be accepted for. If you’re unsure, it’s a good idea to check your credit score via either TransUnion or Equifax to see how you are performing. If you have doubts about being accepted for a new credit card, the best thing to do is to not apply. This is particularly relevant for premium credit cards. If you apply and are declined, this can have a negative impact on your credit score, so you should stick only to credit cards you are confident you will be accepted for.
Be wary of low interest rates and APRs
Many credit card companies advertise low or 0% APRs and low interest rates to get you to open a credit card account. This can be appealing – if you have a balance on your credit card, you won’t have to worry about high charges, right? Unfortunately, this is not always the case. Usually, low or 0% APRs only apply to balances that are transferred. Any new purchase made using the card will have a higher APR. APRs and interest rates can increase if you make a late payment or if you go over your credit limit. If you get caught in any of these circumstances, your interest rate could increase drastically and you could receive a higher credit card bill than you expected. One of our top credit card usage tips is to read the fine print on any promotion involving low interest rates or low APRs. Paying your credit card balance off completely each month is the best way to avoid any interest fees and you will not have to worry about an APR at all.
Avoid foreign transaction fees
When travelling abroad, using credit cards is a great way to avoid carrying large amounts of cash. However, credit card usage often comes with foreign transaction fees – a charge from the credit card company when you make a purchase in a foreign currency. Your credit card company does not have to notify you of these as the terms are stated in your contract. They are usually around 3% of the total transaction cost, so they can add up quickly and be a nasty surprise on your statement when you return home. For this reason, it’s important to confirm your credit card company’s policies before you travel so that you know the best way to use your credit card abroad. Some credit card companies offer lower transaction fees or only charge them if you pay in local currency. Others don’t charge any foreign transaction fees at all. Our credit card usage tip is to ensure you are prepared for extra fees when you return from your trip.
Don’t use the cash advance
If you happen to use your credit card’s cash advance, it’s an extremely expensive way of getting to the credit you have on your credit card. In most circumstances, there’s a minimum fee for a cash advance of around $7.50, or 1%, whichever fee is greater. There’s also no grace period for a cash advance, so you’ll be charged interest as soon as you decide to withdraw it from your credit card. Cash advances themselves have interest rates as high as 25%, making it an unaffordable way to gain funds. Cash advances can also send signals to your credit company that you may be struggling financially, and it can therefore have a negative impact on your credit score also.
Limit the number of credit cards you have
While having multiple credit cards can increase your total credit limit and potentially lower your credit utilization ratio, it can also make managing payments more complex. Start with one or two cards and only apply for additional ones if necessary and manageable.
Keep your personal information confidential
If you reveal your information, you could be held responsible for unauthorized transactions. For this reason, it’s important to protect your data, including your card, PIN number, card security code, and your credit card password for any online transactions.
Speak to a Licensed Insolvency Trustee
If you find yourself struggling to manage your credit card debt, seek help sooner rather than later. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief, meaning they’re excellently placed to advise you on how to manage and reduce your debts. At Spergel, our experienced Licensed Insolvency Trustees have been helping Canadians to reduce their debts by up to 80% for 35 years.
What are the signs you’re not using your credit card responsibly?
You might be using your credit card irresponsibly, or living beyond your means, if you encounter any of the following situations:
- Your credit card balance is growing, not shrinking
- You’re reaching your credit card limit regularly
- You’re carrying a credit card balance from month to month
- You’re only making the minimum payment on your credit card, or missing credit card payments altogether
- You’re using your credit card to take out cash advances
If you often find yourself in any of the circumstances, you should take the following action:
- Stop using your credit card, if you can
- Avoid applying for any new credit cards because you’ve reached your credit limit on other cards
- Review your budget to discover ways to reduce your spending
- If you need to use credit, consider other less expensive credit options like a secured credit card or a line of credit
If you need further advice on using your credit card responsibly or reducing your credit card debt, book a free consultation with Spergel, the ‘get rid of debt’ people. Our reputable Licensed Insolvency Trustees have been helping Canadians gain debt relief for 35 years. No matter what your financial situation, we can work with you to review it and find the best debt relief solution for you and your needs.