Manage your credit cards to maintain financial health

It’s no secret that consumer debt levels in B.C. are high these days—higher, in fact, than in any other province in Canada¹. It’s a problem with many causes, from lower average incomes to higher costs for everything from bus fare to orange juice, and likely playing no small part is the fact that many of us lack the necessary knowledge to best use and manage our credit cards.

To manage our credit cards effectively, it’s necessary to have a solid understanding of how they work, like how interest or fees are charged. Only with that knowledge can we feel more confident about our payment and purchasing decisions.

1. Know and manage your credit limit

Did you know that spending more than our approved credit limit can result in financial penalties and/or temporarily losing the use of our credit cards? Unfortunately, many of us are unaware of what our limit actually is, making it impossible to know if we’re getting close to going over. Before taking any other steps to manage your credit card, therefore, it’s important to make sure you know your credit limit. It will be prominently displayed on your credit card statement or online credit card account.

Once you know your limit, a good way of making sure you stay under it is to get in the habit of regularly checking your accounts regularly. That way you can adjust your spending accordingly if you find yourself in danger of going over. An added bonus of regularly checking your account online is that you can keep an eye on your charges, giving you a chance to catch anything that might be amiss.

Another thing to avoid is carrying a balance close to your credit limit from month to month, even if you never go over. Staying too close to your limit too often raises red flags with creditors looking at your credit history, as it’s taken as a sign of poor credit health.

2. Understand when and how you’ll be charged interest

Though financial institutions will always have the information available on when and how your interest is charged, most won’t be in a hurry to pass along that information. That’s because interest is where financial institutions make most of their revenue from your credit card. In other words, there’s no incentive for them to help you understand and minimize the amount of interest you’re paying.

For purchases that appear on your statement for the first time, you won’t be charged interest if you pay your entire balance in full by the payment due date. However, if you don’t, interest will be charged starting from the transaction date of each purchase.

The exceptions to this rule are cash advances, cash-like transactions, balance transfers and amounts written on credit card cheques. For any of these, you’ll be charged interest right away, starting from the date of the transaction.

Another piece of information that we often overlook is the interest rate itself. Without knowing your interest rate, it’s impossible to make informed choices about how to manage your credit card. If you’re unsure, check your credit card statement for your daily and annual rates.

3. Make more than the minimum payment

Though paying your entire balance is obviously the ideal, realistically many of us have trouble doing so every month. When you can only pay a portion of your balance, pay as much as you can. Even a small amount more than the minimum payment can make a big difference in terms of how much interest you’ll pay, and it’s the only way to move your balance in the right direction.

At the very least, it’s important to make your monthly minimum payment on time, as failing to do so may result in having your credit card use limited or suspended until you pay the outstanding balance.

4. Stay on top of your spending

For many of today’s cash-strapped households, staying on top of spending is often more easily said that done. Part of having good financial health, however, is knowing the limits of what we can afford to spend, and excessive credit card spending can be one of the biggest obstacles to achieving our financial goals.

Just as with managing our credit limit, one of the best strategies for controlling our spending is to monitor it. At minimum, you need to check your paper statements at the end of each statement period, but to really keep track of where your money is going, regularly checking your transactions online is the best strategy. Knowing where you stand will empower you to make the right choices for your budget, helping ensure that credit card interest doesn’t swallow the money you’d rather use in more fulfilling ways.