Tips for when it's OK to use your credit card

Borrowing money isn't inherently wrong. In fact, there are some purchases - rental cars, airplane tickets and large-ticket items (for the purchase protections) - that make sense to put on your credit card. The trick is recognizing what qualifies as creditworthy and what purchases are more likely to lead to unmanageable debt.

debt-hardship

Darren Dickey, president of DebtManagers.ca, a debt counseling organization based in British Columbia, offers this advice for making sure you borrow wisely.

CreditCards.com: When is it reasonable to place a purchase on your credit card?

Darren Dickey: Desperate times and desperate measures tend to take care of themselves.  A '50 percent off sale' does not qualify as a desperate time. Instead, responsible use of credit should be linked to your ability to pay. The problem many Canadians get into is that when the bill arrives, they have not budgeted and are financing the purchase at compounding interest rates.

CreditCards.com: What types of purchases should consumers avoid placing on credit and why?

Dickey: Insignificant daily items add up fast.  The coffee and doughnut may seem like $5 now, but by the time you pay it off, it could likely have doubled or tripled due to interest. How likely would you be to buy that same coffee and doughnut if you had to pay $15 up front?

CreditCards.com: What are some tips for borrowing wisely?

Dickey: Here are three tips:

  1. Consider low interest rate credit cards versus loyalty cards.  Points and miles are not free. Credit card users who carry a balance each month will likely pay more in interest than the benefit they may gain from the accumulation and use of points.
  2. Distinguish between wants and needs.
  3. Look a little further out on the horizon. For example, are there any "unexpected" expenses coming up that caught you off guard last year? Plan accordingly.  

CreditCards.com: If you do find yourself in debt, what are some steps you can take to better manage your finances?

Dickey: Most people know exactly how much money they will make each month. The problem is most don't know how much they are spending, or how much they have already committed. You need a personal budget, a road map to success.

The problem is never the big ticket items. Everyone knows rent/mortgage, car payment, electric bill, gas bill, cell phone, etc. The problem is the smaller items that tend to snowball, such as going out for lunch, gifts and school-related expenses for the kids.

You need to be in control of your spending. YOU make the decision each month as to where your money goes; you need to make a wise and informed decision. You can't have it all. You need to decide what is more important -- going out for lunch or managing your debt.

See related: Gail Vax-Oxlade talks money management, 59 percent of Canadians pay off their credit card balances

Published January 28, 2011

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