Common credit advice that may not be right for you
There's a lot of conflicting advice out there about how to best manage your credit cards. Some of it is unquestionably good, and some of it is bad. But for most credit advice, whether it's good or bad depends on you -- your spending behaviour, your ability to manage credit and your current financial situation.
To sort through the good, bad and "it depends," two financial experts weigh in on five often-heard bits of credit card advice and explain why the advice might -- or might not -- be right for you.
1. You should have
only one credit card.
"In the ideal world, one credit card is all anyone will need," says John Eisner, president, Credit Counselling Services of Atlantic Canada. However, the real world often isn't ideal, so there are lots of exceptions.
If you're married, Eisner advises having at least
three cards between you: one for each individual, and one joint card. "I
believe that all genders should maintain their independence," he says. "I don't
that all the time in my line of work." Instead, he's seen couples who split up after a decade or more of marriage, and suddenly one spouse "doesn't exist" as far as credit history goes.
These are other reasons you might want to have more than one card:
Rainy day credit fund: "Some
people like to keep
a credit card with a high limit on it for a major emergency," says Ellan Dickieson, creditor relations expert, Credit Counselling Canada. "They're using it as their emergency fund."
For your day-to-day charges, though, it's advisable to have a card with a lower credit limit. If you use a high limit card for everything, it's easy to lose track of how much you're spending. For this reason, It's better to charge up a card with a $1,000 limit than one with a $20,000 credit limit.
A credit booster: If you have an older card you don't use anymore, getting a second card and leaving that account open might be good for your credit score, as creditors like to see a long credit history. Your repayment behaviour stays on your credit report for seven years, but if you close the card in your mid-20s, then want a house in your mid-30s, you won't have that good credit behaviour on your report to boost your score.
More cards, more options: Not all stores accept all cards, and not all rewards programs are the same, Dickieson says, so it's wise to have an arsenal of cards at your disposal to be sure you can pay when you get to the register and take advantage of whatever rewards program is best for that particular store. You can see where your card earns the most points by checking your terms and conditions.
But before you apply for another card... Don't run out and get another credit card just to improve your credit rating, as the number of cards you have is only a minor part of the credit-score equation.
"It influences one of the smallest weighted categories that they have," says Dickieson. In addition, having multiple cards makes it easier to forget a payment here and there, and that will be detrimental to your credit rating.
shouldn't accept a credit increase from your bank.
There are pros and cons to accepting a credit increase from your bank. On the plus side, as long as you don't max out the increased amount, you'll be using a lower percentage of your credit limit (known as your credit utilization ratio).
For example, if you have a $5,000 credit limit and you are using $2,500, you're utilizing 50 per cent of your available credit, which is high. If your credit limit is increased to $10,000, the $2,500 you're using is only 25 per cent, and that lower credit utilization can increase your credit score. A significant portion of your credit score is calculated by your credit utilization, and the lower it is, the better.
Getting another credit card can accomplish the same thing, but, Dickieson says, "every time you open a new account, they have to check your credit." That's not only reported on your credit report, but your score can take a minor hit with each credit check.
But before you accept a higher credit limit... There are dangers in having a higher credit limit, especially if you are utilizing the additional credit and especially if you are receiving frequent increases. "If you need more, you might want to talk to your financial institution about a different product, maybe a line of credit, which is a much cheaper interest rate," Eisner says.
3. Making the
minimum payment is enough.
"You should always maintain the minimum to ensure you keep your credit score and your credit rating in good order," Eisner says. "But you need to put money on the principal; otherwise, the debt is never going to go away, especially if you're still charging."
He explains that 20 years ago, minimum payments on credit cards were 5 per cent of the outstanding balance. Now, they can be as low as 1 or 1.5 per cent. If you're maintaining a balance, that might not even cover the interest you're being charged.
These lower minimum payments make it easier for consumers to make their payments, Eisner says, which is helpful when you're weathering a financial storm, but paying the minimum will stretch the debt out longer -- sometimes years longer.
"So during those tough times, [making the] minimum payment's OK to help you through the hurdle," Eisner says. "But when the hurdle is gone, it's time to get back onto principal, principal, principal."
Read the fine print: It's important to look at the amortization on your credit card statement and not just at your minimum payment. This lets you know how long it will take to pay off your credit card bill if you're paying only the minimum. You might be shocked. It could take you 17 or 18 years -- or longer. Your statement should include a timeline of how long it will take to pay off the balance if you pay only the minimum.
4. Never pay an
If you're looking for a basic credit card with no rewards or other perks, a fee-free card is the way to go. However, cards that come with an annual fee often come with perks that may make that fee worth your while. Choose the type of card that works best for you.
"If you're paying an annual fee, there would have to be some incentive," Dickieson says. This might be a lower interest rate, free car-rental insurance or better rewards, such as double the reward points of the fee-free option.
"You have to read the fine print because different cards offer different reasons for charging the annual fees," Dickieson says.
Do the math: Make sure you understand what you'll be getting for your money, and do the math to see if the fee makes sense for you.
something on credit for the reward is always worth it.
"The rewards cannot be the priority," Dickieson says. But she and Eisner agree that if you are managing your credit card wisely and paying the balance off in full every month, then the rewards you receive from using the card are great.
"But for those carrying balances, paying astronomical interest rates, using their credit cards hoping to accumulate more miles or points and that debt continues to grow, it's not a good thing," Eisner says. "Because what is it really costing you for those points?"
Read the details, Dickieson says. "You may not actually be getting the rewards you thought you were."
"It all comes down to you have to know yourself," Dickieson says. "If you can't manage one credit card, you shouldn't get a second one. If you can't pay the minimum payment, you shouldn't be looking for the rewards. If you can't limit your spending, you shouldn't be getting a credit increase."See related: Regional debt and saving advice for Canadians, The truth about 5 common credit myths, 7 financial experts: 'If you only do one thing this year, do this'
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