Credit cards are a great invention. But if not handled with care, they can blow up in your face.
High interest charges and fees are a major hazard for inattentive cardholders. You may also find your card doesn’t offer the perks you want, such as reward points or travel insurance. Luckily, Canada’s credit card marketplace is competitive, so it pays to shop around for the right one for your needs.
Here are 10 things you need to know.
1. How to choose
The first step is to compare features among cards and find the one that best suits your needs. Are you a student? Do you need a card that offers free groceries or gas? Or one that is in U.S. dollars? The Financial Consumer Agency of Canada helps you narrow the field to compare the annual fees, interest rates, minimum payments and grace periods.
2. Top travel rewards cards
Cards linked to travel rewards are one of the most popular forms of loyalty card. Rewards Canada has gone through more than 60 travel rewards cards sold in Canada and come up with its favourites. They also offer comparative information on about 20 travel reward cards.
3. Service charge savvy
It is important to understand the service charges that can show up on your bill. Again, the Financial Consumer Agency of Canada does a good job of explaining them and comparing apples to apples across the different issuers.
4. What's the grace period?
Federally regulated issuers (such as banks and trust companies) have to provide a grace period of at least 21 days, according to new rules that came in Sept. 1, 2010.
But credit unions and finance companies follow provincial rules. Their cards may provide an interest-free period on new purchases only if you pay the current and previous month's balance in full by the due date. (You're penalized if you carry a balance from the month before.)
5. Pay before the due date
Don’t pay on the due date if you want to avoid interest charges. Sometimes, credit card issuers set the due date on a Sunday or statutory holiday. Paying on the due date means your payment won’t be credited to your account until the following day. Not only will you pay interest for the month, but you may have to wait an extra month to restore your interest-free period on new credit card purchases.
6. Don’t miss payments
Your interest rate can shoot up if you miss a few minimum payments. That’s because you’re seen as a deadbeat who’s likely to default. Credit card agreements say that if you’re late in paying the minimum amount for two months in a row or twice during a one-year period, you can face an annual interest rate of 25 per cent or more.
7. Pay more than the minimum
If you pay the minimum on your credit card bill, you can double the purchase price of what you buy. Suppose you owe $1,000 on a credit card at an 18 per cent annual rate. If you pay only the minimum (3 per cent or $30 a month), you’ll take 10 years to get rid of the balance and you’ll pay $1,798.89 in total. Looking at the numbers is scary.
8. The fine print
Your financial institution may have the right to withdraw funds from your bank account to pay for any overdue credit card bills. This clause, known as “the right to offset,” can be found in many credit card agreements. Here’s a way to avoid problems: Keep your credit cards and your bank accounts at different institutions.
9. Credit card insurance
You may be charged a hefty premium for credit card insurance that covers only your minimum monthly payment, not the full balance. Credit card issuers often give you a few months of free insurance and unless you cancel, you’ll be paying for this insurance forever. Check your bills to make sure you’re not a victim of negative option billing when it comes to overpriced credit card insurance plans.
10. Out of country fees
Watch out for fees when using your credit card outside of Canada. Most card issuers charge a foreign exchange conversion fee, ranging from 2 to 3 per cent of the transaction amount, in addition to the exchange rate. Since exchange rates fluctuate every day, you can lose money if you return a purchase and get a refund from a foreign merchant. That’s because you may have a different exchange rate on the date the refund is processed than on the original transaction date.
By Ellen Roseman