Credit cards: Managing your credit rating
Developing good habits to maintain a healthy financial lifestyle
Ryan Remiorz / THE CANADIAN PRESS
Many people forget to shop for a credit card that suits their needs. There are 250 credit cards on offer for Canadians and each has its own terms and conditions.
“I’m definitely not an impulse shopper. I suffer from deep buyer’s remorse; if I don’t have the ability to pay it off, I’ll fret over it. If it’s a large sum of money, I’ll fret over it. I keep delaying big purchases, because I’m looking for my best options,” says Laura Brown.
Toronto-based Brown developed healthy financial habits early on. Unlike her spending-spree peers in university, Brown understood that a credit card is just a way to make a purchase and not a source of income.
Infographic: The Savvy Self-Starter
“I was told to use it for things like groceries and then pay it off,” she says. “I didn’t spend money that I didn’t have.”
Ursula Menke, commissioner of the Financial Consumer Agency of Canada (FCAC), says that’s a concept that gets lost on a lot of people.
“The reality is, just because you have a credit card, doesn’t mean you have any more money. You still have to pay for that purchase,” she says.
Credit cards are payment tools and nothing more. When used properly, they can provide their share of benefits.
“You get a nice itemized list of everything, so they really help you keep track of your spending,” says Menke. “And, if you pay it off before the due date every month, there is no extra cost associated with that purchase.”
She warns consumers must have the discipline to pay off purchases every month by the due date.
“If people can’t do that, if you’re the kind of person who gets carried away, and indulges in impulse-spending, you’re probably the type of person who should keep your card tucked aside for emergencies.”
Most Canadians, about 64 per cent, use their credit cards responsibly, as a method of payment, not a means of borrowing. They also pay off their balance in full each month, says the Canadian Bankers Association.
But many people forget to shop for a credit card that suits their needs.
Canadians aren’t short on choice. There are 250 credit cards on offer and each has its own terms and conditions. Of those, 70 are low-rate or no-fee cards.
“For people who know they are going to carry a balance for a little while, there are lower interest cards,” says Menke. “They don’t offer any frills or rewards points, but they do carry a lower interest rate and that’s very helpful.”
Interest costs can take a huge bite out of your bank account. Put simply, interest is the cost of using someone else’s money. All cards offer interest-free credit from purchase to payment date. If you’re going to carry a balance, you’re electing to pay for that convenience.
For those only making minimum payments, FCAC warns interest costs can be enormous.
“People should be questioning themselves carefully, and asking whether that convenience is worth it,” Menke says.
Consider this example: Let’s say a consumer has an outstanding balance of $2,000 on a credit card with an 18 per cent interest rate. Minimum payment is 2 per cent of the balance. This means, the minimum payment would be $40 (or 2 per cent of $2,000).
If this consumer only makes the minimum monthly payment of $40, it would take 30 years and 10 months to pay off the balance in full. Further, the consumer would end up paying $4,931.11 in interest.
If this consumer were to make $100 payments, it would only take two years to pay off the balance in full, and $395.65 would be paid in interest.
Maximizing available credit while making minimum payments can also have a negative impact on your credit report and score.
“Lenders only want you to use 30 to 35 per cent of your limit,” says Elena Jara, director of education for Credit Canada Debt Solutions Inc. “Anything beyond that becomes too much debt load and doesn’t look good.”
Your credit score (also called credit rating) is a number between 300 and 900, the higher the number, the better your score. A high score will help ensure you get the loan or mortgage you apply for down the road.
“It’s important because it tells a story about the consumer. It determines whether you’re credit-worthy or not,” she says.
The number of credit cards you keep, your payment history and your debt-to-credit ratio all affect your score, for better or worse.
“If you have five, six, seven cards, at a certain point lenders will start to see you have a high potential for racking up a lot of credit,” says Menke. “I don’t know what that point is, because individual lenders will assess that differently.
“Personally, I use one,” she adds.
A lesser-known, but equally important detail to keep in mind, is that too little information on your report can have consequences, too.
Good practice is to use your credit card to make a few purchases each month. This shows lenders that you’re disciplined and credit-worthy.
Another healthy habit is credit-monitoring.
You can gain immediate access to your credit report and score online for a small fee by visiting one of two Canadian credit bureaus, TransUnion or Equifax Canada. If immediacy isn’t an issue, simply request your report via mail free of charge.
Heather Battison, vice-president, international, TransUnion, says by checking your report often, you can target areas in need of improvement.
“Remember you are in charge of your credit,” says Menke. “Do not go over an amount that is sensible for you. Every person has to assess that based on their own financial needs.”
Rules to live by
Penny-pinching applies to your credit card, too. Keep your hard-earned dollar in your pocket with these simple rules from Ursula Menke, commissioner, Financial Consumer Agency of Canada.
Rule 1: Read the small print. Some people haven’t grasped just how much money they spend on interest. “The reality is, many people don’t read their contracts before they sign them, which can lead to ugly surprises.”
Rule 2: Steer clear of cash advances. “They tend to be very expenses and cost interest from the moment you it take out until you pay it back. There’s no leeway,” she says.
From the moment of withdrawal, you’re charged two fees: the advance fee, itself, and the banking fee. What’s more, a higher interest rate is also applied to that purchase until it’s paid off in full.
Rule 3: Keep a close eye on things. “Check your statement every month,” warns Menke. Credit card fraud is prevalent. Get in the habit of checking your statement every month to make sure all purchases are your own. If you see a suspicious purchase, call your credit card company immediately.
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