Financial Literacy Month – Credit Card Use
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One of the most commonly used forms of credit is the credit card. Having a credit card can be very useful and is often a requirement when travelling, making reservations, renting a vehicle, or even just having in the event of an emergency on the road. It is also a form of credit that is easy to misuse. In the recent BDO Affordability Index we learned that credit card debt is the most common type of debt that Canadians are incurring.
It is important to recognize that using a credit card can come with a cost if you are not paying off the balance each month. Many are in the habit of only making minimum payments or not paying the entire balance off each month and there is an interest charge on the outstanding balance. Credit cards come with a high interest penalty, at times in the range of 20% or more. Many people do not understand this cost and feel like as long as they make the required payment, they are maintaining their good credit. In actuality, the best impact to your credit score is when you pay your credit card balance in full each month. If you are carrying a balance you will see the interest charges accumulate on your card each month it remains unpaid, and ultimately you could end up paying significantly more for the goods purchased on that card than their original purchase price. A good rule of thumb is to consider when making a charge on your card — will you be paying that off in full in the next month or two? If the answer is no, maybe you rethink charging that purchase to your card and wait until such time as you have saved the cash for that purchase. Credit card statements now also show how long it will take you to pay off the balance if you only make the required payment. This will also give you perspective on the ultimate cost of only making the minimum payments.
Credit cards may be obtained as a couple. If one person obtains a credit card, it may be possible for the spouse to obtain a secondary card on the same account. It is important as a secondary card holder to understand what that means in terms of liability on the account by the spouse. Some credit card companies when issuing a card to a second individual will add the person to the account as a joint borrower, which makes them legally liable for any balance owing on the card. Other companies may issue a secondary card to someone, but their cardholder agreement may be such that the individual is not liable for the full balance. There can be a difference between being a joint borrower and a secondary card holder, and who is liable for the debt on the credit card. This can be an important issue in the future if something happens to one of the cardholders or if the couple separates. Again, it is important to understand your liability if you are agreeing to take on a second card on an existing credit card account.
In terms of rebuilding your credit, secured credit cards can be a very useful tool. If you have had credit issues in the past, there are companies that will offer a “secured” card. This is where you provide the credit card company with a deposit that they hold in case you default on the payments on the card. In exchange they give you a credit card with a limit amounting to your deposit. This is not a prepaid card. The way you rebuild your credit is to charge on the card and pay it in full each month. Doing that every month over a period of time will gradually improve your credit score. And you have not lost your deposit. At any time, if you decide to cancel the card, you would be entitled to receive your deposit back, assuming the card is in good standing and paid in full.
