Do you think you know everything about how your credit card works? Here are five things you may have missed.
Credit cards are relatively easy to obtain and are accepted everywhere. They are very convenient means of payment to have in your wallet. If used incorrectly, they can also lead to excessive indebtedness, which is very difficult to get out of due to the high interest rates (approx. 20% and more).
Pierre Fortin, licensed insolvency administrator and president of Jean Fortin et Associés, gives five tips for responsible handling and avoiding unnecessary costs.
1. Be careful with small monthly payments
With credit cards, only the minimum payment is due each month. Currently it is 4% for cards issued before August 1, 2019 and 5% for cards issued after that date.
However, paying only this amount can give us the impression that we do not have a debt problem since all of our payments are up to date. An illusion that can cost us dearly because it means we pay a lot of interest and little capital. Therefore, it will be very difficult to overcome these sales.
2. Do not exceed 35% of your credit limit
Ideally, you should not exceed 35% of your credit limit utilization. Additionally, it may be frowned upon by credit bureaus. “If necessary, request an increase in your credit limit to avoid exceeding this percentage,” explains Pierre Fortin, who adds that this limit should be at least twice your monthly expenses.
3. Understand how the grace period works
One of the big advantages of credit cards is the grace period. “The law requires that a grace period must be observed between the date of purchase and 21 days from the date of invoice,” specifies Pierre Fortin. This means you will not be charged interest on your purchases during this period. For example, if you make a purchase on September 2nd and your billing cycle is September 30th, interest will not accrue until after October 21st. “But be careful, because you will only benefit from this grace period if you repay the entire balance before the due date. In this case, if an unpaid amount remains, interest will be charged retroactively on all purchases made during the billing period, even if you have paid a certain amount,” mentions Pierre Fortin.
4. Avoid multiplying cards
Currently, many credit cards offer benefits that are difficult to resist: points that can be redeemed for cash or other benefits, welcome bonuses, etc. To make the most of them, you may be tempted to get new ones. But Pierre Fortin reminds us that this may not be the best strategy. “These multiple inquiries are mentioned in the credit file. This can send the wrong signal to lenders and creditors, leading them to believe that you are strapped for cash and looking for loans,” he notes. In his opinion we should limit ourselves to one or two cards, at most three.
Do you have several and want to get rid of one? Please note that “cutting” it is not enough to get rid of it. You must also contact the issuer and ask them to close your account, otherwise it will continue to appear on your file. For the same quality, you should keep the oldest cards: they have more weight in your file because they provide a better overview of your payment history.
5. Monitor the impact on your credit report
“If you regularly miss or make your credit card payments late, it will have a catastrophic impact on your credit report because creditors will report these defaults to Equifax and TransUnion even if they don’t. “These are only small amounts,” warns Pierre Fortin.
Your credit score will be permanently affected, which can impact several other areas of your finances (loan applications, insurance costs, etc.).
SOME LESS KNOWN BENEFITS
- They are the safest payment instruments against fraud and theft. The law governs these situations for credit cards, and the maximum amount you may be responsible for will not exceed $50. With an ATM card, in certain circumstances the bank may be more reluctant to replenish funds stolen from your account.
- Would you like to get a refund for a purchase but are having problems with the retailer? If you paid with your credit card, you can initiate the chargeback by asking your card issuer to reverse the transaction.
- Many credit cards offer extended guarantees on your purchases as well as travel insurance, not to mention rewards points that can be redeemed for cash, etc.