The ability to use credit cards wisely is one of the most important financial skills you can learn. Everyone has different habits when it comes to credit card use and no single approach is best.
When we got married in the early 1970’s, my husband dealt with the Bank of Montreal which introduced the MasterCharge (now Mastercard). The other big banks issued the Chargex (VISA) card.
Unfortunately for us only about 1% of retailers accepted MasterCharge at that time. Large department stores such as The Bay (in Canada) and JC Penney (in the U.S.) only accepted their own house-brand charge cards.
When I later started my banking career I was issued a VISA card with a $200 limit. So, with a low credit limit on one card and another card that wasn’t accepted in most places, it was easy to avoid the pitfall of credit card debt.
That didn’t last long. I guess because we were such nice people, we subsequently were inundated with pre-approved cards in the mail. In no time we owned several more cards and the limits were increased exponentially on almost a monthly basis.
We still managed them well until we made the mistake of financing our new business with credit cards. Now that debt is finally paid and we only use credit cards occasionally – for convenience – and pay the balance monthly.
Except for PC points I don’t bother with rewards cards. Points I had earned on both my Sears and HBC cards dropped off and I won’t use them again.
What is your credit card strategy?
1. I transfer my balances. Carol occasionally transfers the balance from her everyday card to one offering 0% interest for 12 months. That’s like a free loan because it gives her a year to pay down a big purchase without incurring any interest. She sets up automatic monthly transfers to ensure the full balance is paid before the free interest period ends.
Related: Best balance transfer credit cards
Getting a free loan is a no-brainer. You’ll take a small hit on your credit score for opening a new card, which will be insignificant if you have good credit.
In Scotland they have equivalent debt relief solutions such as a Trust deed which are similar to the solutions offered in the UK.
Make sure you pay off the balance before the introductory rate expires and becomes exorbitantly higher (what the credit card company wants). Also, if you’re late with a payment your teaser rate may disappear and the card’s usual interest rate will kick in.
2. I have cards from all my favourite stores. Monica has 16 store credit cards that she opened in order to get a discount on her first purchase. She hasn’t used most of the cards since that first time but she uses several others regularly in order to obtain coupons, free shipping and other enticements the retailers offer only to cardholders. She always pays her bills in full.
It’s great if you can obtain significant savings by taking out a new credit card when you shop. Just don’t do it too often as this actually lowers your credit score by a few points each time.
Retail branded cards can be an excellent way to earn discounts and loyalty points from your favourite retailers but be very conscientious about paying them off in time. These cards have the highest interest rates – up to 30%.
Additionally, if you carry more than about seven cards in all, credit agencies may downgrade your rating even if your payment history is solid. You look like a spending spree ready to happen.
3. I charge everything. Nancy and her husband, Matt, both carry a single credit card linked to the same account. They charge just about everything, from groceries and car repairs to restaurant tabs and charitable donations. They pay one big bill in full each month. Best of all, the card pays them back 1-3% of their purchases.
Related: What’s in your wallet?
You can optimize your rewards credit card by adapting your spending habits. A float of up to nearly two months (depending on the billing cycle) provides an interest free loan before (full) payment is due.
Don’t get so caught up in rewards that you overspend. The danger here is that you’ll run up a bill that you can’t pay in full by the due date. You’ll be charged interest, obliterating the pluses of this strategy. Bypass rewards card if you are an impulse spender – you don’t need additional incentive to spend.
4. I don’t use a credit card. I just stick to cash or debit. Often people who have dug themselves out of a large debt no longer trust themselves with credit cards. Grace only uses her debit card as the money comes directly out of her account. She tracks her spending with her account register.
If you try to exceed your balance your purchase will be declined – a small embarrassment. Sometimes, accidentally overdrawing your account will result in overdraft fees of $35 or more, or other bounced cheques.
The biggest risk is theft. A thief could get access to your bank account, and unlike credit cards, there is no liability limit. If you never use credit cards you forfeit the single best way to improve your credit score even if you have a good track record with fixed monthly payments such as a mortgage or car loan.
How do you choose?
There is a dizzying array of credit card choices and they change all the time:
- Low interest rates
- 0% introductory offers
- No annual fees
- Cash back
- Airline miles
- Merchandise programs, etc, etc.
All have their benefits, but the best perks are the ones you’ll actually use. If you carry a balance, choose a low interest rate card. If you’re an occasional card user and pay your monthly balance in full, a card with no annual fee is right for you. Choose a rewards card you can optimize.
Identify your spending habits to make a wiser decision and get the product best suited for you.