People who use credit cards can be separated into two camps: transactors and revolvers. Transactors will pay off their credit card bill every month, without fail, and incur no purchase interest cost as a result. Revolvers, on the other hand, will let a balance revolve into the next payment period and usually pay the minimum interest cost (banks love this type of consumer). This leaves the overall debt basically intact and the credit card holder paying a hefty interest cost (usually around 19%) to maintain what is essentially a loan.
Never be a revolver unless it is an emergency!
The dark side of credit cards is that they enable spending where income is not ultimately present. I cannot tell you how many bankruptcies or consumer proposals are created by people who carried multiple credit card balances and the combined debt simply ballooned out of control because they did not have control of their expenses and spending. If you feel like your income situation and spending habits would fall victim to this sort of debt spiral—stick to a debit card.
For those of you who absolutely need a credit card, revolve your balances, and want to save money: switch to a low-rate credit card. Many financial institutions offer them, and even if yours does not you can simply opt for a Balance Transfer and likely pay a promotional interest rate in the single digits for a period by transferring to a new card. Do not think you are beholden to a particular credit card issuer. See what is out there.
Transactors Love Points
There are a few reasons why the modern-day consumer needs to possess a credit card. They help build and maintain credit, which means you pay less on important purchases like a mortgage or new vehicle financing. They are good for very short-term cash shortfalls. You need a credit card to book a hotel or rental vehicle. One benefit not yet mentioned–but coveted by those who can be considered sophisticated when it comes to their finances—is earning points. Many basic and high-tier credit cards offer varying degrees of cash-back, investment, and travel rewards. Rather than have the bank earn interest of off you—you can instead turn the tables on them by earning money on your spending.
Put all your large or high-volume purchases on a cash-back or points credit card. It just makes sense/cents. Some higher-tiered credit cars have what could be considered big annual fees, but this is often negated by the sheer points-earning that occurs during the year, and then some. Keep in mind, however, that banks tend to raise the bar when it comes to qualifying for these top-tier offerings—meaning you often have to earn a lot of combined household income and have an almost perfect credit score. Don’t fret, though, as most entry-level credit cards will earn points.
Keep Credit Utilization Low
Consumers who carry large balances on their cards for extended periods of time will have reflected on their credit bureau’s a high credit utilization ratio, which may make it harder for them to secure financing on agreeable terms or at all. While it is true banks will typically include around 3% of available balance in any total debt service calculation (even if you don’t carry an active balance), it is best to just keep paying it off every month. You can even set it up where the full balance is paid automatically on a specific date. Use caution here, though, an automated process could compromise attention to your transaction history. You always want to be reviewing your statements and searching for any abnormalities.
Credit Card Fraud Has Zero Liability
If you fall victim to a card skimming event at a gas station or restaurant, or even misplace the card where it was happened upon by an unsavory individual, any fraudulent transactions will be reimbursed or essentially erased from your history. With a debit card, this process is similar, however, can be longer and require the signing of certification documents. In this situation, your account is directly compromised, and funds will not be available until the investigation wraps up.
Lower Chequing Account Transaction Fees
Another benefit of a credit card is that if you don’t maintain a large enough balance in a chequing account to waive the monthly fee, you could consider switching to a pay-as-you-go plan and paying on an as-needed basis. Do all your spending on the credit card and you could be potentially saving a few dollars each month. This typically only works if your chequing account transaction volume is on a lower side but can be an effective way to save money on both business and personal accounts.
A credit card can be a double-edged sword, but when used effectively can yield benefits to the holder like earning real rewards, conferring protection, and keeping your credit situation in good standing.
