What Should you be Aware of When Using a Credit Card?
When you begin your financial life, it can be difficult to avoid debts, which is normal. There are good debts, in other words, debts that help you build assets, such as a mortgage loan. But be careful: there are also other debts that you should avoid, like an unpaid balance on your credit card.
Pay off the total balance each month
A credit card is practical, and it is important to use it wisely. When you pay with your credit card and pay it off at the end of the month, you do not pay interest. Therefore, what you paid $100 actually costs you $100.
You are probably wondering: What happens if you do not pay it all off at the end of the month? You end up with an unpaid balance. It can be costly because credit cards have high interest rates: 19% on average! Therefore, what you paid $100 could end up costing you $120. It adds up fast! Unfortunately, one in three Canadians does not pay off his or her credit card regularly.
Here is an example: you buy a couch for $2000 with your credit card on 15 January, and your billing period ends on 1 February. You have until 21 February to pay the balance of $2000 without interest being added. That is what is called a grace period. If you only pay off half of the balance during the grace period, you will still pay interest every day on $2000, from the moment you bought your couch (on 15 January here). If you pay off the rest, let's say, on 21 March, you will have paid about $69 in interest, if we do the math with a 19% interest rate. So yes, it adds up fast. It does not seem so bad to pay $69 in interest, but if you often postpone your repayments, at the end of the year, that is a lot of wasted money!
Therefore, you should use your credit card only for expenses you are able to fully pay off at the end of the month. That is really less stressful!
Avoid paying only the minimum balance
If you only pay off the minimum balance of your card each month, it will take you time to pay off your debt. You will also pay a lot of interest.
Getting back to the couch you bought for $2000 with your credit card, if you only paid the minimum required of 5% per month, it would take you 2 years and 1 months to pay it. In the end, you would have paid about $424 of interest, for a couch that originally cost $2000. That money would be better off in a
TFSA. You do not know what a
TFSA is? Consult the
TFSA,
FHSA or
RRSP: why do you need one? web page.
Build your credit report
The start of your career is also the time when you build your credit report. Your report will follow you and determines your credit score.
Your credit score is used to determine the amount you will be able to borrow and at what rate. It is like your financial reputation. It is determined by the way you manage your debts, for example your credit cards. That is another good reason to use your credit card wisely.
A score usually varies between 300 and 900. The higher it is, the better your credit report. Lenders look at your credit score to know if they can trust you by lending you money.
There are two main credit bureaus in Canada: TransUnion and Equifax. They determine your score and track it. It is a good idea to check your credit report at least once a year to see if there are any errors or if someone applied for credit without your knowledge. You can do so via your financial institution. Some financial institutions offer it online or on the
TransUnion 
and
Equifax websites.
What should you do if you have several debts to pay off?
- Start by paying off the debt with the highest interest rate. You will pay less interest ... therefore, you will not be throwing money away!
- If you have a balance to repay on a credit card, do it before creating your emergency fund. Since the interest rate is high, that is your priority. The Autorité des marchés financiers offers calculators that allow you to assess various repayment scenarios:
- It is often preferable to pay off your student debt after your other debts because interest is tax deductible. Therefore, the amount of your taxes will be reduced thanks to the interest you paid on your debt.
Who can help you manage your debts?
- You can see a financial advisor at your caisse or bank.
- You can also use free, or almost free, services, from the
coopérative d'économie familiale (ACEF) in your area (French only).
- If you think that you have lost control, you can ask a syndic to help you. A syndic is an impartial (neutral) professional who is responsible for advising you in your best interest.