Credit Cards

Credit Cards: What You Need To Know

How Much Credit Can You Afford?. Never borrow more than 15% of your yearly net income.

Example: If you earn $500 a month after taxes, then your net income per year is: 12 x $500= $6,000

Calculate 15% of your annual net income to find your safe debt load. $6,000 x 15% = $900.

So, you should never have more than $900 of debt outstanding.

Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 15%.

Monthly payments should not exceed 10% of your monthly net income

Example: If your take home pay is $500 a month: $500 x 10% = $50 Your total monthly debt payments should not total more than $50 per month.

Comparing Credit Cards

Cost of Credit

• Know the penalties for missed payments.
• Annual Percentage Rate (APR), interest rates can vary greatly. One card issuer could offer you a 5.99% rate while another could offer you a 21% rate. These rates may be promotional, fixed, variable, and may or may not offer a grace period.
• Know whether you are required to pay an annual fee. Many cards charge annual fees for services that you may not be interested in using.
• Transaction fees are typically charged when completing a balance transfer, making cash withdrawal, or using a cheque that draws against the account.
• Ensure that you understand your grace period for the account. Often times, your balance is separated by the type of transaction it generated from. Your purchase balance may have a 20 day grace period while cash withdrawals begin to accrue interest immediately.
• Make sure that you understand payment allocation rules for the account. Many credit card companies will apply your payment to the lowest interest rate on your account. For example, if you have a 0% interest rate on your balance transfers and a 15% rate on your purchases, your payments will go to the 0% balance first while the 15% balance continues to accrue interest each month.
• Finance charge computation. Ask your creditor how your interest is calculated each month. If you are not given the opportunity to avoid interest charges by paying in full each month, maybe its time to start shopping around.

Credit Card Features

• Is your credit limit sufficient for your income level and comparable to other credit lines that you have?
• How widely is the card accepted? Think about the advantages of a major credit card verses a store credit card.
• If shopping for a major credit card, do you want MasterCard or Visa?
• What benefits and features are available?
• Does the card offer a points or rewards program that you can take advantage of?
• Is there an annual fee? If so, what does the card provide for that fee?

Before You Sign Up for a Card:

• Shop around for the best terms. www.consumerinformation.ca or www.bankrate.com is a great resource for finding the best card for you.
• Read and understand the contract.
• Don’t rush into signing anything.
• Once a contract is signed, get a copy of it.
• Know what the penalties are if you miss a payment or exceed your credit line.
• Figure out your total price when paying with credit.
• Make the largest payments possible.