Using Your Credit Card Responsibly

This article is part of our Finance Hub.

Credit cards are useful, but they’re also dangerous. Their convenience makes it very easy to pile up debt, debt which will accumulate interest quickly and ruin your finances. This guide will teach you how to use your credit card responsibly, enjoying the benefits of credit card use while avoiding the risks.

Life Without Credit Cards

If credit cards are risky, why not go without one? If you don’t trust yourself to limit your credit card use and budget strictly, this may be the best option for you. However, the benefits of having a credit card are significant. First, a credit card gives you flexibility that other payment methods can’t. Because they only need paying off once a month, you can spend money that isn’t yet in your bank account. If you need groceries now but you don’t get paid until the end of the week, you can use your credit card. Second, it makes online shopping much easier. Not all online retailers will accept debit cards. Using your credit card for shopping also lets you use chargebacks in emergencies, although you should check your credit card company’s chargeback rules carefully before attempting one. Third, many Canadian banks will limit the number of free transactions you can make each month. [caption id="attachment_352" align="alignnone" width="3000"]

FILE - In this Saturday, Jan. 5, 2013 file photo, a person inserts a debit card into an ATM machine in Pittsburgh. A gang of cyber-criminals stole $45 million in a matter of hours by hacking their way into a database of prepaid debit cards and then draining cash machines around the globe, federal prosecutors said Thursday, May 9, 2013. (AP Photo/Gene J. Puskar, File)[/caption] You can avoid paying to access your money by using a credit card for all or most of your spending, and then only removing money from your bank account to pay off your credit card. Fourth, using a credit card is a great way to build a credit history. If you use your card responsibly, that will show up on your credit report. Of course, if you use it irresponsibly, that will be on your credit report as well. Finally, while it’s less important, companies like to give away rewards to credit card users. Using a credit card can get you anything from cashback to money off at your favourite retailer to free movie tickets. If this is your only reason for getting a credit card, you probably shouldn’t do it, but it’s a nice bonus. If you’re confident in your ability to manage your credit card use, then getting a credit card is a good idea. Used responsibly, you get a whole suite of benefits for the price of your annual fee, which is often nothing.

Credit Card Management

The safest and best way to use your credit card is simple. Treat it more like a debit card than a loan. Pay your card off in full at the end of every payment period to avoid having to pay interest, pay on time, and stay below your credit limit to avoid additional charges (staying comfortably below your credit limit also helps to keep your credit score high). Credit cards carry high interest rates, and if you aren’t paying your balance in full at the end of every month the debt can accumulate very quickly. If paying your balance off in full isn’t an option, pay as much as possible, not just the minimum. Paying only the minimum, even a fairly modest credit card debt can follow you around for years, if not decades . If you find yourself unable to pay off your credit card in full for a few months in a row, stop using the card immediately and focus on reducing your spending. The key to making these payments every month is budgeting. First, know how much you can afford to spend each month, and don’t spend more than that on your credit card. Second, monitor your spending carefully. Keep a running total of your credit card use in every payment period, so that you can compare your spending to your expected income and your credit limit. This way, you can make sure that you have enough income to pay off your credit card in full.

Choosing Credit Cards

First, choose carefully the number of credit cards that you have. With every major bank and retailer offering their own credit card, it would be easy to fill your wallet with them. Don’t do that: it makes it more difficult to track your spending. Having one credit card makes budgeting very easy, but having more than one will let you split up your spending between multiple lines of credit: your total credit limit compared to your actual debt plays a huge part in calculating your credit ratio, so it can be better to have two or more credit cards with a small balance each than one credit card with a big balance. Use your best judgement here, and only follow this strategy if it won’t increase your spending. Remember also that having too many open credit cards can worsen your credit report, so find a healthy balance.

Second, shop around. Don’t just look at the APR in large print, because these are often introductory rates. Read the small print to compare interest rates, charges, and credit limits.