How to Use a Credit Card Effectively for Financial Success

When used correctly credit cards can be an effective financial tool.

Before signing up for any credit card, make sure you understand completely how they work and the impact of not using them correctly. Credit cards can be an important component to building credit, but if used incorrectly, it can damage your credit worthiness and ultimately impact your ability to qualify for mortgages and other loans in the future.

Although it may seem like credit card companies will provide anybody with a credit card, this isn’t necessarily the case. Credit card companies are in the business of making money and they don’t do that by providing credit, to individuals who may not pay them back. 

Qualifying For A Credit Card:

·       18 or 19 is the minimum age of majority, depending on your province of residence

·       becoming a citizen or permanent resident of Canada

·       For unsecured credit card applications, bankruptcy discharges are not accepted.

·       a respectable credit rating. Click HERE if you want to improve your credit rating

·       Social Insurance Number (SIN)

·       Every card has a different application procedure. Once you've decided the card you want to apply for, get ready to provide your social insurance number full name, and details about your salary.

The approval process could take a few days to a week. Thus, don't be upset if your credit card application is rejected. Instead, analyze the typical justifications given by banks when rejecting credit card applications so you know what to improve on:

·       Bad credit rating

·       Poor history of paying back loans or other debts

·       Poor income and excessive debt

·       a scant work history

Understanding Your Credit Card

Understanding your credit card terms is crucial when selecting a credit card and applying for a new account in order to be aware of your rights and obligations. In other words, before you apply for a credit card, make sure you understand completely the following:

·       What interest rate is charged? If there is an low introductory rate, how long does it last and when will it go up;

·       When is interest charged on balance of what you owe? Federally regulated financial institutions must provide a minimum 21 day grace period. For example, suppose you buy a smartphone using your credit card on January 15. On February 1, you get your January credit card statement which includes the smartphone purchase. A 21-day interest-free grace period will apply to purchases made in January. You have until February 21 to pay off the smartphone and your other purchases to avoid interest charges.

·       Keep in mind credit cards are a type of unsecured debt and unsecured debt will always have higher interest rate charges compared to secured debt. An example of secured debt would be a mortgage or line of credit; in these cases if the borrower doesn’t make the necessary payments the lender can seize the borrower’s home.  Keep in mind if you don’t make the minimum monthly payment by the due date, your interest rate may increase, but this will depend on the type of credit card and the lender. 

·       How much interest is charged will depend on the type transaction you used the credit card for. Cash advances will typically charge more interest than when credit cards are used to purchase an item. 

Click HERE for more information on how a credit card works.

Use a Credit Card to Increase and Preserve Your Credit Rating.

Using a credit card is a straightforward, practical strategy to raise your credit score, in addition to providing convenience, perks, etc.

The danger to a lender when you borrow money is quantified by your credit score. The likelihood that your credit card application will be accepted depends on your credit score. Your application may be rejected if your credit score is lower than the minimum needed by the credit card company.

Use this chance to improve your financial standing and raise the chances that your application will be accepted the following time.

Get your free credit report to confirm your details, then begin establishing or raising your credit score. Find ways to increase your income and pay off other debt. Reapplying shouldn't be done until after some time has gone and you have a longer history of employment.

A better credit score, in plain English, signifies a reduced risk to lenders.

Establish and Adhere to a Cash Flow Plan

What’s the first step to managing your cash flow, so you don’t incur significant credit card debt? Any great financial plan starts with having a cash flow plan. In case you’re wondering, having a cash flow plan is different than having a budget.

What do you think people feel when they hear the word budget? Excitement and happiness or dread and restrictive? Exactly. No one likes being told how or where to spend their money. Having a cash flow plan is more about clearly identifying what your goals are, rather than telling you how and where to spend your money.  

There are no shortage of phone apps and other tips (anyone heard of money jars?) to help track spending for individuals, but most of these involve a lot of work and significant change in daily behaviour. To ensure permanent changes in long term spending, subtle changes are easier to implement rather than overhauling someone’s spending habits.

The first step in developing a cash flow plan is identifying all of your expenses as either committed or spendable. Committed expenses are characterized as expenses that don't have any emotional attachment to it and the amounts do not change from month to month. Property taxes and mortgage payments are examples of these. Spendable expenses are the exact opposite; there is an emotional attachment to the purchase and the amount can change drastically from month to month.

 Here are some examples:

 Examples of committed expenses:

• Mortgage/ rent payment • Car loan/ lease payment • Property taxes

• Insurance premiums • Investment contributions • Childcare

 Spendable or spendable Cash Flow is the total amount of money that goes towards expenses that meet the following criteria:

• Often unpredictable due to high variability and volatility

• Potentially influenced by emotion

• Easy to lose track/ overspend

Once you have identified categorized all of your expenses as either committed or spendable, you should set up your banking to look like this:  

You should have two accounts at your bank – one for committed expenses and one for spendable expenses. When you get paid, whether it’s once a month or every two weeks, whatever you have calculated what your spendable expenses are be for the month this should be immediately redirected to a separate account. The other account is your committed expense account and if possible the bill payments should be automatically paid.   In the beginning when we complete a cash flow plan for individuals we break the spendable account amount to a weekly basis, rather than monthly; we have found that this makes it easier for individuals to track and achieve their goals.

Initially we discourage individuals from using credit cards because it is very difficult to track expenses and unknowingly accumulate debt. However, if you are at the point where you can clearly identify your committed and spendable expenses, a credit card can be used to help establish credit and take advantage of loyalty programs.

Where Budgets do Work

Budgets can work when your financial goals have a specific amount and deadline; vacations, vehicles, or home renovations are examples of spending goals where budgets can be successful. Once you have identified how much you will need and when you need it, this can become a committed expense and it should be redirected to an appropriate investment vehicle that matches your timeline. 

Summary

As long as you are aware of the terms of use, a credit card can be a useful financial instrument. Credit cards can, however, result in increasing debt, hefty payments, and a low credit score if they are used recklessly.

Consider your spending patterns and how you intend to use your credit card carefully. Then decide which card best suits your financial objectives and situation.

Click HERE if you are curious about how your debt may impact your retirement plan.