4.3.10 Video: Using credit cards wisely

Introduction

Credit cards are accepted just about everywhere. Canadians use them for both big and small ticket items, for online purchases, for emergencies and for everyday uses. 

When managed wisely, credit cards provide a great convenience to consumers like you and me. Let's find out more about how Canadians use their credit cards.

Segment 2: Problem identification

A- (street interview)

Question: Do you have a credit card? How many?

How often do you use your credit card? What do you purchase on your credit card?

How do you know if you have a problem with your credit card use?

B- The average Canadian has several credit cards. And one in three users don't pay their balance each month.

Credit card charges can add up quickly. There are a lot of Canadians who are paying more interest than they need to.

Segment 3: How credit cards work

In its simplest form, a credit card provides a short-term loan. When you purchase something on your credit card, like a pair of pants or a dinner out, in effect you are borrowing money from the credit card company to pay for the purchase. So, as with any type of loan, you have to pay back the money you've borrowed.

The credit card company sends you a bill each month that lists all your purchases, showing how much you owe. If you pay your credit card charges in full by the due date, you are usually not charged interest on your purchases.

If you do not pay the balance in full by the due date, you will have to pay interest charges.

Credit cards can also be used to take out cash advances. Cash advances on credit cards run up daily interest from the day the money is taken out until the day it is paid back in full.

How much does it cost to pay off a credit card bill? That depends on how you pay it. Let's look at an example:

(Voiceover)

Say you have a credit card balance of $1,000 and the annual interest rate is 18%.

If you make the minimum payment of 30$ per month, by the time you pay off the charges, you will pay a total of nearly $1,800, including $800 in interest, and it will take you 10 years to pay off that original $1000.

Or, if you pay a fixed amount of $100 per month, you will pay a total of $1,090, including $92 in interest and it will take only 11 months to pay off.

That’s a big difference.

Segment 4: Manage your credit cards.

Here are some ways to manage your credit cards effectively:

• Choose the card that has the features you want at the lowest cost. For help in choosing a credit card that meets your needs, use the Financial Consumer Agency of Canada's Credit Card Selector Tool
• Limit the number of credit cards you hold – if you don't have them, you can't use them.
• Keep your credit limit low to help you avoid overspending.
• Read your monthly statement to understand the rules for your card: when interest is charged, for which transactions, and when you have to make payments.
• Avoid taking credit card cash advances, except for emergencies.
• Try to pay the monthly balance in full, and not just the minimum amount.

Conclusion

Manage your credit card like you would maintain a house: responsibly and diligently. That way, your costs are kept low and your finances tidy.