How to Make the Most of Your Credit Card

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If used strategically, a credit card can be a powerful tool. It can help you stay on track of your finances, build your credit score, and potentially earn rewards such as points, cash back or frequent-flyer miles. Easy, convenient, and safe, credit cards are the preferred method of payment for many Canadians, with over 76 million Visa and MasterCard cards in circulation in Canada as of 2021. 

But, if you’re not careful, a credit card can become a detriment to your financial health, leading to overspending, bad credit, and debt. Whether you’re new to credit cards or have used them for years, it’s essential to have a plan for how you will use your credit card and to be aware of potential pitfalls.

Here are 5 key steps to make the most of your credit card.

1. Understand your interest rate

Simply put, interest is the cost of borrowing money from a lender, such as a credit card company. As the Financial Consumer Agency of Canada explains “Interest is the money you’ll pay if you don’t pay your credit card balance in full by the due date.” Credit card interest is typically shown as an annual percentage rate (APR).

Different credit cards have different APRs, and rates can range anywhere from 11.99% to over 30%. The higher your APR, the more interest you risk accumulating on an unpaid balance. A credit card may also offer a promotional APR on purchases and balance transfers. After the introductory or promotional period ends, the rate will return to the standard APR disclosed in the card’s terms. 

It’s important to keep in mind that interest isn’t only charged on purchases. Your APRs for cash advances and balance transfers may be different than your APR for purchases.

To see what the APR is on your credit card, view your credit card’s terms and conditions.

2. Pay off your balance in full before the due date

When you make a purchase with a credit card, the credit card company pays the merchant upfront for you. It is then up to you to pay back that money within a certain time frame. The total amount of money that you owe on your credit card is called a credit card balance.  

When you make a new purchase with your credit card, you have an interest-free grace period. The grace period begins on the last day of your billing cycle, and according to federal law, financial institutions must provide a minimum 21-day grace period. If you pay off your balance before the grace period, you will not have to pay interest on your balance.

Making your payments on time and in full can help you establish a pattern of responsible borrowing and boost your credit score. Paying after the due date can result in fees and negatively impact your credit score. You’ll need to pay at least the minimum amount, but you should aim to pay more.

Set up AutoPay

Many credit card issuers offer automatic payments on credit cards. This service automatically pays off the balance when a statement is posted. The customer still decides how much to pay and when the payment is deducted.

If you have a credit card through CUA, you can use AutoPay to ensure that you never miss a payment. With AutoPay, you can pay off the full balance or the minimum payment amount.

Pay off as much of your balance as you can

If you cannot pay off the full balance on your credit card by your due date, you will have to pay interest on the amount that you do not pay off. The credit card company will multiply the remaining balance each day by a daily interest rate and add that to what you owe.

This can add up over time. Take the following scenarios for example:

Original Balance Payment APR Time required to pay off balance Interest Paid Total paid
Scenario #1: You pay only the minimum amount $2,000 $60 per month 19.99% 4 years and 2 months $942.82 $2,942.82
Scenario #2: You pay the minimum amount plus $140. $2,000 $200 per month 19.99% 1 year $205.97 $2,205.97

By increasing your monthly payment by even a small amount, you can significantly shorten the time you need to pay off your balance and save on interest. Even if you can’t pay the full amount, pay as much as you can. 

3. Take advantage of rewards

To gain the most benefit from credit cards, you should leverage your card’s rewards. Credit cards can offer a variety of rewards, from points to cash back to airline miles.

If you travel frequently, you may benefit from a card that offers airline miles or other rewards for travel. On the other hand, if you are looking to save money on your everyday purchases, a cash back rewards card might be the right choice.

Before you pursue any sort of rewards, you need to know how much of your balance you can pay back. Keep in mind that living beyond your means and accumulating interest and credit card debt will cost you more than any potential earnings from rewards. 

4. Make a budget and stick with it

Because using a credit card is so convenient, it can be tempting to spend more with a credit card than you would with cash. Studies have consistently shown that people spend more when paying with a credit card. This includes one MIT study in which shoppers spent up to 100% more when using their credit card to pay instead of cash.

To avoid overspending with a credit card, take the time to make a budget that allocates a fixed amount of money per month for daily purchases, taking into account expenditures like clothes, eating at restaurants, and money for hobbies. Setting a fixed amount will help you avoid impulsive purchases that may be hard to pay off.

If you are not sure how to create a budget, CUA offers a variety of resources that can help you get started.

5. Review your statements

Whether you already have a budget or are setting out to create one, you should also take a moment to review your credit card purchases. Ideally, you should do this once a week. At the least, you should review your monthly statement. Doing so can help you identify unnecessary spending or errors.

Be sure to avoid the following:

  • Missing payments: Missing payments can bring down your credit score and make it more difficult to qualify for credit in the future.
  • Paying below the minimum requirement: If you don’t pay the minimum payment amount on your credit card bill, your credit card company may report it as a missed payment.
  • Applying for new credit cards too often: Each time you apply for a credit card, a new inquiry appears on your credit report. Applying for several credit cards at once can negatively impact your credit score and raise red flags to lenders.

A credit card helps you build your credit history. When you want to rent an apartment or make a major purchase down the road, a good credit report will help your application. If you use your card responsibly and make regular payments, a credit card can help you make the most out of your everyday purchases.

CUA partners with Collabria, a Canadian payment solutions provider, to provide a line of credit cards tailored specifically to meet your individual needs.

If you have any questions about what credit card works best for your goals or how you can make the most of your current credit card, schedule an appointment with a CUA financial advisor. E-mail us or call 902-492-6500 to get started.

Published March 8, 2022.

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