Credit Cards

The good, the bad and the ugly – how to practice safe plastic

When you think about it, credit can be a double-edged sword. On the one side, credit can help you make large purchases, take a family vacation and even make holidays more extravagant. However, without a solid plan to repay your debts, credit can cause serious financial hardship.

The information below can help you practice safe plastic and keep credit card debt at a minimum. If your cards are already causing you financial trouble, Consolidated Credit can help. Call us today at to speak with a trained credit counsellor or request a Free Debt & Budget Analysis.

The pros and cons of credit cards

With so many Canadians relying on credit to live beyond their means, it can be difficult to remember that credit cards can be a positive part of a healthy financial plan. In fact, with the right budget strategy and a solid understanding of how credit works, you can effectively use credit cards without causing financial hardship.

ProsCons
Allows you to buy needed items & manage emergency expensesInterest charges mean you pay more for purchases
You don’t need to carry cash or write chequesPurchases and cash advances can mean added fees
You have a record of your purchasesLosing track of your spending & impulse purchases can cause financial difficulties
Reward cards can offer great credit incentives“Purchase acceleration” can cause you to spend more to earn more rewards

Choosing the Right Credit Card

Practicing safe plastic starts with choosing the right credit card for your individual financial situation. Understanding the various types of credit cards and how the individual terms and fees will work within your budget can help you maintain a healthy financial outlook.

  • Traditional Credit Cards. These cards are the most basic type of unsecured credit. You can purchase items up to a certain credit limit, and are charged a standard interest rate based on your credit rating.
  • Rewards / Points Credit Cards. These cards provide an “incentive” for making purchases. You earn points for every purchase made, and once you have earned a certain number of points, you get something back (airline travel, groceries and other special items.) Reward and point cards almost always have a higher interest rate.
  • Cash Back Credit Cards. These cards give you a percentage of cash back on some, or all, of your purchases. Typically, this is in the form of a cheque at the end of the year. Much like a reward card, cash back credit cards almost always come with higher interest rates.
  • Secured Credit Cards. Sometimes incorrectly referred to as a “pre-paid credit card”, secured credit cards require you to put money into an account with the creditor. This amount (minus any fees) becomes your available credit limit. You make charges and pay bills as you would with any other credit card, but if you fail to pay, the money gets deducted from your deposit. This type of credit card can often be obtained regardless of your credit profile and help build a positive credit history if you have had trouble with debt in the past.

When choosing a new credit card, it’s important to do your research and consider the following factors:

  • Annual Percentage Rate (APR) – Credit cards can have different values for different types of purchases. Some cards may offer a lower, introductory, APR that only applies for a certain period; and many come with a penalty APR if you’re late or miss a payment.
  • Fees – These can include account setup, additional cards, over limit and maintenance fees, as well as fees for various kinds of transactions.
  • Payment Schedule – Not all credit cards are paid back in the same way. Understanding how payments are calculated will help you accurately figure credit card debt payments into your budget.
  • Terms of Rewards or Cash Back – Don’t just assume a card offering rewards or cash back are better. The incentives may not be worth the extra interest and fees. If you ding yourself carrying a balance from month to month, do some calculations to make sure you wouldn’t be better off purchasing the reward in cash and using a traditional card with a lower interest rate.

Your Credit Worthiness

When it comes to credit, lenders use the three C’s of credit worthiness to decide if you qualify for a credit card and what interest rates you’ll pay. Understanding what creditors look at will help you improve your financial outlook and get the best interest rates possible.

The following provides details on the three C’s:

CharacterCapitalCapacity
Do you repay your debts?

Have you used credit before?

Do you pay your bills on time?

Do you willingly repay your debts?

How long have you lived at your current address?

What assets do you have in case you don’t repay your debts?

Do you own a home or other property that can secure the debt?

Do you have a savings account?

Do you have any investments?

Do you have the means to repay your debts?

How long have you been at your current job?

Is your job in a stable field?

What is your salary?

How much debt do you currently owe?

What is your debt to income ratio?

What are your current living expenses?

As a general rule, you should always look at your credit report before applying for credit. This will give you an accurate picture of what your creditors will see when assessing your credit worthiness. It will also give you time to fix any errors before applying for a new card.

The following is a list of common errors to look for:

  • Aliases that aren’t you. When you use different variations of your name, they will appear as aliases on your credit report. Make sure they are all actually you.
  • Duplicate accounts. Accounts that are listed more than once on your credit report increase your total debt owing. As a result, duplicate accounts may affect your credit worthiness.
  • Incorrect account status or debts owed. Always check the status of each account to make sure they are all accurate. Delinquent account statuses are negative marks on your credit worthiness, make sure this information is correct.

Using Credit the Right Way

Once you’ve been approved for your card, you need to make sure you use your credit in a responsible way that fits within the boundaries of your budget. In order to use your credit card the right way you need to understand how much credit really costs.

Let’s say you make a $1,000 purchase on a credit card with an 18 per cent APR:

  • If your minimum monthly payment is calculated as 2% of your current balance, your first payment is $20.
  • If you only make the minimum payments it will take 151 months (that’s 12 years and 7 months) to pay off this debt in full.
  • In total you will pay $1,396.77 in interest
  • This means your $1,000 purchase actually cost $2,396.77

Of course, if you factor your credit card purchases into your monthly budget, you can determine the best way to pay back your debts without piling on the interest charges.

Your Rights and Responsibilities

The final piece of the credit card puzzle comes in knowing your rights and responsibilities as a consumer. This includes understanding the terms and conditions of your credit agreement.

Under current consumer protection laws, your creditors must provide you with 30 days’ notice prior to making:

  • A change in your credit limit;
  • An extension of your grace period;
  • A decrease in any charge, not related to a change in interest rate;
  • A change to any optional service on that account; or
  • A change in your interest rate as a result of a change in the reference rate.

Knowing your rights as a consumer is also important when it comes to ensuring credit card companies deal with you fairly and according to the law. These rights vary from province to province, in Ontario most of these rights are outlined by the Collection Agencies Act.

You can find more information about the consumer rights in your region by visiting www.consumerinformation.ca.

Additional Resources

If you would like more information download our self help guide, All About Credit. If you still need help eliminating your credit card debt, Consolidated Credit is here to help. Call us at or request a Free Debt Analysis.