How to manage a credit card successfully

For many Canadians, managing one or more credit cards can be difficult. Debt adds up quickly with everyday spending, and if you aren’t tracking your budgets accordingly, you can rack up a hefty balance in no time. Being smart with tracking will promote financial awareness and maximize rewards in the credit card’s accelerated categories.

Luckily, financial institutions offer mobile apps and alerts to notify you of everyday purchases, fraud notifications and even spending trends so you are more aware of your habits.

Monitor your monthly statement and learn the habit of budgeting

At a minimum, a good rule of thumb is to monitor your monthly statement and ask yourself which expenses are necessary and which expenses could be classified as discretionary.

By developing the habit of monitoring your account — and assessing your spending — you can strengthen your ability to prioritize your spending. This is a budgeting tool that goes a long way to making sure you have enough money to pay necessary bills, set aside for rainy days, before spending it on non-essential expenses. It's also the foundational for learning the discipline of how to budget and save for significant expenses, like a vacation, home renovation or retirement.

Develop the habit of paying your bills on time

When it comes to payment, it’s best to pay the full balance every month. If you can’t, you should endeavour to pay more than the minimum, pay on time and even set up automatic payments so you don’t miss any due dates. Late and overdue payments are major factors in the calculation of your credit scores — and credit scores dictate how expensive debt and loans will cost, and the availability of credit. The better your credit score, the more options you have and the cheaper borrowed funds will cost you.

Access tools to build your credit score

There are a few best practices to maintain or build a good credit score, including the 15/3 rule. As a practice, the cardholder repays their bill in two rounds: the first payment is 15 days before the due date and the second payment is three days before the statement date.

According to credit experts, using the 15/3 rule can help you increase your credit score in a relatively short period of time. The theory is that the frequent, regular and consistent payments signal to creditors your ability and capacity to use credit responsibly and reduces your credit utilization (how much you borrow from the available funds) and your debt-to-income ratio (how much you owe versus how much you earn). Read more on how to increase your credit score.

Learn how to spend smarter

From a spending perspective, many experts suggest following the 50-30-20 rule, where 50% of your spending goes towards needs like bills and everyday expenses, while 30% can be used on things you want, and 20% is set aside for savings. Using your credit card statement and your overall budget, you can quickly determine if you're following this smart spending rule. If not, examine your spending and find ways to rebalance how you spend your money. Do this consistently and you'll find it easier to save for bigger goals while spending more strategically.

Develop long-lasting (and beneficial relationships)

When it comes to maintaining your credit health, you'll want to be aware of the major factors that go into calculating your credit score. While credit scores can be complex algorithms, in general the major factors include:

  • Consistent history of paying on time — Consistency is key
  • Your credit utilization ratio — This is the amount of credit used, compared to credit you have access to. Lower ratios are better
  • Average age of your credit products — Do you have long-standing credit relationships? Longer relationships are considered better
  • The variety of credit products you own — From credit cards to mortgages to car and student loans: variety is better
  • Number of recent hard inquiries on your credit file — How often a creditor has checked your credit history

While many responsible consumers often want to simplify their access to credit, there is a danger to closing and cancelling credit cards and other forms of revolving credit. For instance, if you close a credit card you've held for decades, this can alter the average age of your credit products and can hurt your credit score. Another way to hurt your credit score is to consolidate high-interest debt on a lower-interest loan (for instance, a low interest credit card). While this can be a great strategy for reducing the cost of debt and getting out of debt faster, it can be tempting to close all other credit cards and this can hurt your utilization ratio which can hurt your credit score.

Find ways to save on the cost of borrowing

For those who want to pay down their debt quickly it's best to consolidate higher-interest debts using a low-interest credit card. By dropping your annual credit card interest rate from 22.99% to 12.99%, you can save more than $900 in interest costs (assuming you carry a $5,000 credit card balance and it takes three years to repay the loan). Good options for low-interest credit cards include:

If you're looking to switch your credit card to take advantage of lower interest rates and debt consolidation, consider cards that offer annual intrest rates between 12.99% and 13.99%, such as the RBC Visa Classic Low Rate card. With this card, you pay a low annual fee — around $20 per year — and get access to a rewards rich card with a low-interest purchase rate. One of the key advantages is the purchase security and extended warrany insurance offered to cardholders. You can also save with additional merchant perks, such as more points and per litre savings at Petro Canada, complimentary DoorDash subcription and higher reward earnings at Rexall pharmacies.

Other options from top Canadians banks include:

Cash back cards worth considering

While interest rates on cash back cards will not be as low, these cards can help you find more room in your budget through cash back rewards on everyday purchases. Good options include:

  • Neo Mastercard: This no annual fee Mastercard offers a credit limit of up to $10,000 and cash back between 0.5% and 5%. Apply for the Neo Mastercard and receive instant approval plus learn to monitor your spending and maximize rewards through upgrades and perks only available to Neo customers.

  • Tangerine Money-Back Credit Card: This no annual fee cash back card is great for those building their credit with a minimum personal annual income threshold of just $12,000. Cardholders get top-rate Money-Back Rewards in two purchase categories of their choice (such as grocery, furniture, gas, etc.) and a third category if they open a Tangerine savings account.

Bottom line

When used responsibly, credit cards are a great way to build awareness of your financial health. It requires users to spend within their limits and monitor usage and trends, while free tools will allow you to ensure optimal product diversity, as well as a utilization ratio of your credit products to maximize your credit score.

Finally, you must frequently monitor monthly statements and credit reports to find any errors and flag them for investigation so your credit history is reflective of your spending habits.

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Winston Sih Journalism lecturer | Contributor

Winston Sih is a freelance multi-platform journalist and television host specializing in technology, digital media, travel, and personal finance. Sih works with a variety of clients as a media consultant, is a journalism lecturer at The Creative School at Toronto Metropolitan University, and media professor at Seneca Polytechnic.

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