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When used correctly, a credit card is a helpful tool to build your credit history, and it’s safer than carrying cash. However, when mismanaged, a credit card can quickly become one of the most expensive borrowing options, leading to serious debt trouble. For many of our clients, credit card debt is the second biggest debt they carry.
To help you avoid the common pitfalls that come with owning a credit card, I talk with Diane Cunha, one of our certified credit counsellors. She shares tips for using credit wisely to avoid debt problems.
Table of Contents
How do credit cards work?
One of the reasons cardholders get into trouble with their credit cards is they don’t understand monthly billing cycles and due dates. Not understanding when credit card companies start charging interest can cost you money if you don’t have enough cash to pay the bill in full before interest starts clocking, especially if late and partial payments accumulate interest charges of 18% to 29% on an unpaid balance.
Here are three credit card billing terms you should understand:
The credit card billing cycle refers to the start and end date of your credit card statement and typically covers a 30-day period. Your billing cycle will fall on the same days every month. For example, your billing cycle may run from December 8 to January 7. Any purchases, cash advances, and payments you make in this period will appear on your January 7 statement.
The due date refers to the date by which you must pay your credit card bill or else you will be charged interest and late payment penalties on your unpaid balance. Your credit card due date is typically 21 to 25 days after the end of your billing cycle. For example, if the end of your billing cycle is January 7, then your credit due date would be January 28. Your billing cycle and due date is always marked on your credit card statement.
The grace period is the 21 to 25 days after the end of your billing cycle until the date your credit card balance is due to be paid before interest charges will begin.
Why is understanding how credit cards work important?
You might think you get a 30-day grace period when you buy something on a credit card, but that’s not always the case. In our example above, if the only charge you put on your credit card in a month is a purchase you made on December 9, and the due date is 21 days after your last statement date of January 7, then you technically have until January 28, or 50 days, to come up with the cash to pay of your purchase. This is good to know if you are making a big purchase. If, however, you put that same charge on your credit card on January 7, the last day of your billing cycle, you have only 21 days to make sure you have enough money to pay off your credit card before interest will be charged on that purchase.
8 ways to avoid credit card debt
Once you have an understanding of how credit cards work, the next step is to avoid accumulating debt on your credit card by using credit wisely. Here are eight tips:
- Limit the number of credit cards you have. These days, the major credit card providers like Visa and MasterCard are accepted virtually everywhere. Therefore, there’s no need to have multiple credit cards in your name. Limit yourself to owning just one or maximum two credit cards at one time.
- Keep your borrowing limit low. The lower your limit, the less likely you are to over-extend yourself credit-wise. Keep your credit card limit low enough that you can afford to repay the balance in full each month. If you need a higher limit for a special expense, say a vacation, you can increase your limit temporarily, then lower the limit again when you no longer need that much credit.
- Pay off your credit card balance in full at the end of every billing cycle. Paying off your balance in full by the due date saves you money in interest charges and will help build a good credit history over time.
- Plan big purchases ahead of time. Never use a credit card as a borrowing tool. If you are planning to make a big purchase, make sure you’ve saved cash for that purchase ahead of time. Use a credit card to buy an expensive item so you don’t carry large sums of cash with you to the store, but then be prepared to apply that cash you saved for the purchase towards your card balance immediately.
- Avoid cash advances. A cash advance is an act of withdrawing cash from your credit card, and it’s costly. Think of cash advances as high-interest loans and there is no grace period on cash advances from your credit card. Credit card companies charge an interest rate of 20% or more plus a flat fee the day you take out a cash advance, and the interest charges accrue immediately and until you pay off the entire borrowed amount.
- Be strategic about the credit card you choose. Choose carefully the type of card you want based on your wants and needs. If you think you’ll carry a credit card balance, then it would make sense to go for a low-interest card. On the other hand, if you are a traveler, then having a credit card that gives air miles on purchases is a good idea. By thinking about the type of credit card you should apply for ahead of time, you avoid signing up for more cards later on.
- Automate your credit card bill payments. By automating your credit card bill payments, you never have to worry about paying your bill on time. Align your automated bill payments with the days you receive a paycheque. Consider making small micro-payments on your credit cards every month so you don’t find yourself with a big bill at the end of the month you can’t pay.
- Pay more than the minimum monthly payments. If you do have a balance on your credit card, the only way to avoid getting deeper into debt is by paying more than the minimum monthly payment. You can reduce the life of your debt dramatically by making extra payments on your credit card balance. Additional payments also allow you to save on interest charges.
Using a secured credit card to rebuild your credit score
After our clients are discharged from a bankruptcy or consumer proposal, they use a secured credit card to rebuild their credit scores. A secured credit card is backed by a deposit you make before having the credit card issued to you. The bank uses your deposit as collateral, or security, in case you can’t repay charges you make on your secured card.
To successfully rebuild your credit though, you need two more things in addition to using a secured credit card:
- Make sure you can handle credit, meaning you can repay the balance in full each month.
- Prove that you don’t need all the credit available to you by not borrowing to your maximum limit every month.
For more information on how to use a credit card wisely to avoid debt problems, tune in to our podcast with guest Diane Cunha or read the full transcript below.
Additional Resources
FULL TRANSCRIPT – Show 235 Using a Credit Card Wisely To Avoid Debt Problems
Doug Hoyes: I have nothing against credit cards. If I’m going to the store to buy something for 200 bucks I’d rather carry a credit card than $200 in cash. That’s why a credit card is a good substitute for cash and you may even be able to earn some points or other rewards for paying with a credit card. Used prudently, a credit may also help you improve your credit score which may lower your borrowing costs on big ticket items like a car loan or a house mortgage. Credit cards themselves are not a problem but credit card debt is. If you don’t pay your balance in full at the end of the month you get hit with interest charges which, on a typical credit card, can be almost 20% and a store credit card or a gas company credit card can have an interest rate of 25% or higher. So how do you use a credit card wisely? What should you know about how credit cards work before you apply for a new credit card?
I’m here today with one of our accredited credit counsellors, Diane Cunha, to talk about credit cards and credit card basics. So Diane, welcome to Debt Free in 30.
Diane Cunha: Thank you for having me.
Doug Hoyes: So you’re a first time guest here on Debt Free in 30, so I’d like you to start by giving the listeners a quick overview of your background.
Diane Cunha: Well, I’ve been in the financial field, so to speak, for about seven years now. I worked at a bank for three and a half, I also worked for two not-for-profit counselling agencies as a credit counsellor.
Doug Hoyes: So you worked at a bank – and I don’t want you to tell me what bank it was – I mean I know but it’s not relevant here. What was that like?
Diane Cunha: Over all it was a good experience. I learned a lot about finances, I learned a lot about what options are there for people; but there was the aspect of sales with the bank. There was the aspect of you need to make sales in order to make the bank money.
Doug Hoyes: Yeah, so you’re advising people on “Now you’ve got to get this credit card, you got to do this, you got to do that.” And we’ve talked about that on this show before when Sandi Martin was on we talked about that as well. So obviously there’s an element there. But okay, let’s get back to the present day; so what is it you do here at Hoyes Michalos then?
Diane Cunha: So I do a wide range of things. I am a credit counsellor; I see people during their consumer proposals or bankruptcy sessions. So during that time period you are required to meet with a credit counsellor as a requirement for discharge duties. What we talk about is budgeting, we talk about re-establishing credit, we talk about the future; because there’s nothing we can essentially do with what happened in the past. We want to move forward from everything. So we do talk about how to re-establish positive in your credit world.
Doug Hoyes: Yeah, it’s designed to help people; that’s the whole purpose of these sessions.
Diane Cunha: Exactly.
Doug Hoyes: And obviously you talk about budgeting and things like that.
Diane Cunha: Hm-mm.
Doug Hoyes: Okay, so let’s talk about credit cards. The typical person we help here at Hoyes Michalos owes around $17 000 on personal loans and lines of credit and they owe almost $16 000 on credit cards. So it’s the second biggest debt they owe, much larger than what they owe in income taxes, student loans and other forms of debt. So it’s a big problem and, of course, the problem is that the interest rate on credit cards are a lot higher than what you typically pay on a personal loan or a line of credit so obviously credit card debt is something to avoid. So let’s say that one of our listeners gets a credit card offer in the mail or they get offered a credit card when they walk into a store or, you know, their friendly neighbourhood bank teller, as you just described, is offering them a credit card; what should they be thinking about before they agree to sign up for a credit card?
Diane Cunha: So they should be thinking; three major points is why are they getting the credit card; so what are the benefits of it? It’s convenient. A credit card is convenient when, you know – I tell a lot of the clients an emergency would be; I’m stuck in a parking garage, I can’t get out. I need a credit card to get out.
Doug Hoyes: It would be good to have one then?
Diane Cunha: It’s convenient to get out of there. So another point to make is that credit cards do help establish and re-establish credit if your credit is not in a good spot. It’s also great for rewards and points if you use it properly. So it’s definitely based on a personal basis of why you’re getting that credit card.
Doug Hoyes: But is it also a risk then that if I’m getting a credit card for points I can be spending too much on it then too?
Diane Cunha: That’s right. So essentially everyone knows themselves is what I say. I say, you know what, if you don’t trust yourself with a credit card, use it for gas. Fill up that tank; $50. You can’t spend $100 at the gas station when your tank is 50.
Doug Hoyes: Yeah, and I think obviously having access to credit is one of the dangers that, you know, people maybe aren’t quite so cognisant of right from the outset. So, for almost all of our clients, and you’d know this, they have credit card debt and it didn’t happen overnight, it built up over time because they didn’t consider their credit card just as the thing “I put 50 bucks’ worth of gas in” it was, you know a way to borrow and that becomes a significant problem. So normally at the end of the show we hit the practical advice section but let’s just do that right now. You meet with people every day, they want to re-establish or build their credit, they want to do it by having a credit card; so give me your top four tips for people who want a credit card from you.
Diane Cunha: So, when I see people – again, first thing is you only need one. Years ago maybe MasterCard wasn’t accepted at certain places but Visa, MasterCard are the two top –
Doug Hoyes: Pretty much everywhere.
Diane Cunha: Everywhere, you know. You can use those cards online, you can use it travelling, whatever. It’s focusing on – you essentially just need one. I don’t really push for anything more than that especially for establishing; you don’t want to get back to the place where you were at before.
Doug Hoyes: So one is better than 10 is what you’re telling us here.
Diane Cunha: 100%.
Doug Hoyes: Okay, so you don’t need to be signing up for every credit card offer that’s out there, you know. One, maybe a maximum of two, like you say, maybe there’s a place MasterCard isn’t accepted so I get a Visa or something like that.
Diane Cunha: Right.
Doug Hoyes: Okay, so tip number 1, you know, one credit card maybe two.
Diane Cunha: Right.
Doug Hoyes: Second tip.
Diane Cunha: Second tip is keep your credit limit low. You don’t have to have a 10 000, 15 000, $20 000 credit card limit. What are you purchasing for that type of limit? Essentially what the credit card companies do is that they see “Alright, you can handle 500. You’re paying us back, you’re making us money with that interest. You’re paying interest on those products so we will offer you more” in hopes that you will continue to pay interest and continue making them money. So I tell people keep it low. You don’t need a credit card of 5, $10 000. What purchase are you making and really re-evaluate that. Unless you’re going on a trip or saving for that, then yeah, sure, have a $5 000 limit. Keep that in the back of your mind and, like I said, it’s good to have for trips and it’s a convenient factor. But, you know yourself better; you don’t need a limit of . . . excess –
Doug Hoyes: Yeah, and so the credit card company will automatically increase it if things are going well . . .
Diane Cunha: Or they’ll ask you and the thing is, is what I find a lot of clients is, they will ask you but they’ll ask you when you need that money. So you’re maxed out or close to being maxed out so they’ll say “Hey, you know, you’re qualified, you’ll be qualified for another 2 000.” They have to ask you by law but majority of people that I see, they say yes because they’re in a bind and, you know, they’ve already essentially racked up that debt so they need that money to get out.
Doug Hoyes: So in your example where I’m going to be going on a trip, I’m going to be, you know, paying for a lot of hotels and airlines and all the rest of it. So okay, a $5 000 limit would be good. I get back from my trip, would you recommend then calling up the credit card company and saying “Okay, I’m not going on another trip for a year, knock me back down to a thousand bucks?
Diane Cunha: Yeah you could. I mean, like I said, people know themselves better; if you went on this trip, you paid it off in full which is the third point – you should be paying off your credit card in full every month – then you know you can keep it up that high. Maybe you want to take trips every few years, I don’t know. It’s more of you know yourself better but you don’t need – like I said, you don’t need an extensive credit limit.
Doug Hoyes: Keep your limit. And then paying your balance off every month. Like that’s kind of like a no-brainer. And I understand our clients get into trouble because they don’t have the money to pay it off every month and that’s what causes the issues. But, as a starting point, you got to pay it off every month because otherwise you’re getting killed on interest.
Diane Cunha: Right, and I think that people forget that, you know, when you get that statement – I think it was only recently in the past maybe 10 years that they started writing down, you know, it’s going to take you 82 years to pay off your credit card. And I mean it’s very small, it’s in the corner, and people I think, have this illusion that this minimum payment is all I’m required to pay. Well yeah, to keep your credit great but to keep balances down to zero you should be paying everything.
Doug Hoyes: I met with a guy yesterday who told me it was 103 years.
Diane Cunha: Yeah.
Doug Hoyes: So that’s a record I think for me, yeah.
Diane Cunha: So yesterday I saw somebody who was 54.
Doug Hoyes: Yes, I mean that’s insane.
Diane Cunha: It’s 54 years for $6 000 worth of credit card debt.
Doug Hoyes: Wow. Yeah and this guy I think had 13 000 so it’s about double so it kind of makes sense that if you’re only paying the minimum. So okay, so one or two credit cards, keep your limit low, pay off your balance in full very month; what would your fourth tip be?
Diane Cunha: Also you should plan out big purchases. So, you know, I don’t think everybody needs to buy a big TV every year. But, you know, those flashy ads, Black Friday, Boxing Day; those things come up and it’s like “Yeah, you know what, I really do want to buy a TV.” Or, if you want to reward yourself, plan out those big purchases, pay it off, have it saved, put it on the credit card, get the rewards and pay it off and pay no interest. The banks don’t like that. They want you to pay interest. They don’t want to give rewards to people who pay off their balance in full, but that’s what you should be doing. It’s just beneficial to you and do yourself in the long run.
Doug Hoyes: So plan it out and take advantage of what you’ve got there. Okay so, that’s good advice. Now, as I said in the opening my problem with credit cards is the high interest rate.
Diane Cunha: Hm-mm.
Doug Hoyes: So let’s talk about how that works; when does the bank start charging interest? So I know they don’t start charging interest the moment I make a purchase; that’s the whole beauty of having a credit card. So how does it work; do I get an automatic, you know, 30 days’ grace period and then they start charging me interest? Is it always that way?
Diane Cunha: No. So the 30-day grace period is on every purchase they make which is – it’s not true. So people think “You know what, if I buy this, 30 days from now I’m not going to have to worry about interest.” Well, it’s a little bit more complicated than that. So, what you need to know is two things; the billing cycle and the due date.
Doug Hoyes: Billing cycle and due date. Okay, so let’s start with billing cycle; what does that mean?
Diane Cunha: So billing cycle starts – there’s a start date and there’s an end date; it’s typically 30 days and it’s typically the same every single month. So for example, December 8th to January 7th, all purchases, cash advances, payments – anything you’ve done during this period would appear on your January 7th statement.
Doug Hoyes: Yeah, so my credit card statement is always around the same time of the month.
Diane Cunha: Right.
Doug Hoyes: You know; it gets cut off on the 7th or the 8th or the 9th. I get it in the mail or on my computer two or three days later.
Diane Cunha: Right.
Doug Hoyes: So that’s my billing cycle.
Diane Cunha: Right.
Doug Hoyes: Okay, and the other thing you said was the due date.
Diane Cunha: Correct.
Doug Hoyes: So what’s the difference then?
Diane Cunha: So the due date is when you must pay your bill or you will be charged interest. And pay your bill in full, not just the minimum. So this is typically 21 to 25 days after the end of your statement period. So, in our case, the statement ended January 7th so our payment is due January 28th So both your statement period and due date will clearly be marked on the statement; it will tell you, it has to be listed there.
Doug Hoyes: There’s no mystery to this. So if my statement date is January 7th or February 7th – it doesn’t matter what month it is – in this particular case 21 days’ grace period, I’ve got 21 days to pay. So that means then that – okay, we’re getting into numbers here. Let’s slow this down here. So am I getting 30 days to pay, am I getting 21 days . . . like how long is it until I’m going to be charged interest?
Diane Cunha: This is what confuses people; so many people think they have 30 days’ interest free on everything they buy with their credit card but they don’t. They can actually have between 52 and 21 days from any individual purchase to pay it off. So if you charged something partway through your billing cycle, your real grace period on the purchase is the time between the date you put the purchase on and your due date.
Doug Hoyes: So in the example you just gave, my statement ends on the 7th of the month.
Diane Cunha: Yes.
Doug Hoyes: So if I bought something, let’s just say exactly on the 7th, I’m going to have to pay for that 21 days later on the 28th. So I got 21 days’ free interest.
Diane Cunha: Right.
Doug Hoyes: If I made the purchase the day after my statement – so on the 8th – then I get 30 days on the statement plus another 21 days after that.
Diane Cunha: That’s right.
Doug Hoyes: And so that’s where, if you look at the calendar “Okay, I guess I could get a maximum of 52 days without having to pay interest but it could be as little as 21 days depending on when it falls.”
Diane Cunha: Right, and it’s a good way to plan it out. So, if you are making – if you have a big purchase coming up and you do keep track of those billing cycles, if you make that purchase, well essentially you have 52 days’ and start making payments towards it. You can make payments during your credit card period, that statement, or even before the due date. I tell people once you spend something, pay it off right away. Don’t even wait till the statement.
Doug Hoyes: That’s a key point and that’s why I’m of the belief that a credit card should be a substitute for cash; it should not be a way for borrowing. So okay, in your example, I’m going out to buy that big screen TV which costs a thousand bucks or whatever it is, I don’t want to carry a thousand bucks cash with me so I put it on my credit card but there’s no reason when I get home that I can’t go online and transfer the thousand bucks right into my credit card; boom.
Diane Cunha: Exactly.
Doug Hoyes: Or I guess if you want to get a little cuter and you understand how all these billing cycles work, it’s like “Okay, I know that the due date for this particular purchase is the 28th so I’m going to go online and I’m going to program the payment to go on my credit card on the 27th and that way I’m good.
Diane Cunha: Right.
Doug Hoyes: So lots of ways to handle that.
Diane Cunha: Hm-mm.
Doug Hoyes: So you’re saying that your method is the simple way. I don’t need to be tracking what the due dates are and just, you know, pay it all the time –
Diane Cunha: Pay it; out of sight, out of mind.
Doug Hoyes: Out of sight, out of mind. And I’m a big believer – I believe I said it in the book; every show I always get a plug-in for my book in case you’re not familiar with how we do it in here.
Diane Cunha: I am.
Doug Hoyes: “I’m very well familiar with how you like to plug your book at work.” And in the book I say “Look, if you get paid every two weeks, why not make your payments every two weeks. So why not every two weeks, log in, see what’s owing on my credit card, put the payments through. There’s no reason you can’t do that. You don’t have to be waiting till the last possible day.
Diane Cunha: That’s right.
Doug Hoyes: Okay, so really what you’re saying then is a credit card is a substitute for cash. If you’ve got the money in your bank account then fine, use your credit card to pay it off.
Diane Cunha: Right.
Doug Hoyes: It’s nice and simple in that.
Diane Cunha: Exactly.
Doug Hoyes: Okay, now we’ve talked about purchases but there’s another thing you could do with credit cards.
Diane Cunha: Yes.
Doug Hoyes: You’ve probably heard of this; I can get a cash advance. And this is very dangerous obviously because interest does not work the same for cash advance as it works for a purchase; am I right?
Diane Cunha: That’s right. So the way cash advances work – and I see it all the time at the bank. A lot of people come in and I kind of steer people away from that because the way cash advances work, there is no interest free grace period.
Doug Hoyes: There is no interest free grace period on a cash advance?
Diane Cunha: No.
Doug Hoyes: Okay.
Diane Cunha: You are charged interest that day. You’re also charged a fee to take that money out. I had a man come in at the bank once and he was taking out $30. I said “This is going to cost $3.50 plus the interest. And yet he wanted to do it but he had $30 in his bank account. I just didn’t understand the logic of that. I said “You’re paying money to borrow” which is silly.
Doug Hoyes: And is that typical on all credit cards?
Diane Cunha: Yes.
Doug Hoyes: I mean that’s the kind of thing, you can look at your statement and find out is there is a cash advance fee. Obviously there’s interest – there’s no doubt about that. Is there a fee, how much is it? And you’re right, to borrow $30 and pay $3.50, I mean that’s –
Diane Cunha: And that was like a few years ago. I don’t even know what it is now.
Doug Hoyes: Yeah, it could be – and I mean every credit card’s different, they’ve all got different terms and whatnot, but that’s something you definitely want to take a look at. So, no cash advances because you’re getting hammered on the interest rate, pay my balance by the due date and I avoid interest. So, let’s go back to practical advice then; what are some ways then to avoid credit card debt? Because it’s not the credit cards that are the problem, it’s the debt that’s the problem. So what advice have you got on that?
Diane Cunha: Well, I think that, first thing is you should automate your payments. I think we talked about this. So if you pay every – every time you get paid – I think you have a You Tube video about this.
Doug Hoyes: Oh I’m sure I do. You Tube, you can do a search for it there. We’ll put a link if we can –
Diane Cunha: Budget without budgeting?
Doug Hoyes: There you go, yes, that’s an excellent video. So we will put a link in the show notes on the video for that.
Diane Cunha: So essentially you know roughly how much – like I said, I’ll go back to the gas example; so if someone says “You know what, I get paid semi-monthly.” Okay, so you get paid twice a month. So you fill up your tank two times before the pay period, so you owe a hundred bucks. Pay every single time you get paid, automate that so you pay $100 on your credit card. That is the easiest way to avoid any extra charges and in that way, like I said, out of sight, out of mind. You know it’s getting paid, everything is up to date and I mean, like I said, gas is the easiest thing to use an example because it’s give or take $5 here or there depending on the price. So automate your payments; that is a huge, huge way to start paying off your balance in full. An easy way to do it.
Doug Hoyes: And so conceptually how you do that is you say “Well, okay, I know I’m putting 50 bucks a week in my car. So I get paid every two weeks so every two weeks on payday I’ll just automatically program it to put a hundred bucks on my credit card.
Diane Cunha: Right.
Doug Hoyes: Boom, don’t have to worry about it. Okay, and like you say, that way you’re automatically making payments, you don’t have to worry about it. Obviously with a credit card you’re still going to want to look at your statement to make sure that “Okay, I’m paying enough. I bought some other stuff or whatever” but automating it gets a big chunk of the payments out of the way.
Diane Cunha: That’s right.
Doug Hoyes: Okay, so tip number 1; automate your payments. Give me some more.
Diane Cunha: Second one is make a lot of small payments. So if you by chance are carrying a balance, you carry a balance over, there’s some interest there. Make anything you can towards that because that will help bring down the interest charges. You know, a mistake a lot of people do that I’ve seen, you know, they come in, they show me their credit card statements and they’re making $500 payments or $600 payments and I say to them “You probably ended up using that credit card again because you gave more that what you could afford.” So I mean, if you get into a situation where you do have a large balance, make small payments, chip away at it and make affordable payments because at the end of the day it’s counterproductive to put money towards it and then you use it again for groceries. So making small payments is a big key.
Doug Hoyes: Okay, and then you already talked about this; what’s your stance on minimum payments. That’s cool, we’re good?
Diane Cunha: No. Bad, bad, bad.
Doug Hoyes: No, that’s not cool. Not good.
Diane Cunha: You don’t want to just make minimum payments; again, that’s what gets you into the trap. When people come in again for their sessions, I say “On that credit card statement you should be seeing ‘minimum payment $10.’ You see the $10 is 3% of their balance; that’s how credit cards work. So you know you’ve paid off a full balance if you owe $10. That’s just the minimum of what they require and that shows there is no interest. There’s no interest owing on that credit card from your previous balance.
Doug Hoyes: Yeah, but you want to be paying a lot more than that obviously because that’s the only way you’re ever going to . . .
Diane Cunha: That’s right. You want to see where it says – I mean they bold that ‘minimum payment due 10 bucks.’ Well sure $10 and at the full balance we’ll yeah, pay off that full so that every single month the listed amount would be $10.
Doug Hoyes: Yeah, the $10 minimum payment is the payment you make so that the bank earns the maximum amount of interest.
Diane Cunha: Correct.
Doug Hoyes: That’s really what it should say.
Diane Cunha: That’s exactly what it is.
Doug Hoyes: It shouldn’t say minimum payment; it should say maximise the bank’s profit.
Diane Cunha: Hm-mm.
Doug Hoyes: Okay, so we’ve talked about payments, interest periods, all that sort of thing; do you have any thoughts on the type of credit card I should be getting?
Diane Cunha: Yeah, it’s tough because I see people on their credit counselling sessions and I say “What’s your two-year goal? What’s your five-year goal?” because everyone’s different. Not everyone wants to buy a house, not everybody wants to travel. So the type of rewards that are out there – I tell them, I say “What do you like? Do you like Canadian Tire? Go to Canadian Tire, get the rewards. Do you like this store? Get the rewards, get the travel.” Maybe people don’t want to travel but I mean – the rewards I can’t really say which one’s best, it’s what’s best for you. So there’s the risk though that people have that mentality of carrying a balance when they have those rewards so they think “Okay, I’m going to get these grocery points, I’m going to get these rewards.” I did see a lady once and I saw her for a consultation and I said “You know what, you know, proposals probably the best option” she agreed and she was worried about losing her $100 in grocery money. And I said “Well, you’ve paid more than that in interest.” Her interest alone was over $200 a month. So it’s that illusion that it’s like “Wow, I’m getting something for free.” Well, you’re not.
Doug Hoyes: You pay $200 a month so that you could earn over a period of six months, a hundred bucks.
Diane Cunha: Exactly.
Doug Hoyes: It just makes no sense.
Diane Cunha: Right.
Doug Hoyes: Now, you addressed the issue of rebuilding; and so someone comes in, they see us, they file a bankruptcy or consumer proposal, they don’t have any credit cards, they want to start re-establishing. So one of the ways to do that is with a secured credit card because you almost for sure qualify for a secured credit card even though you’ve gone through a bankruptcy or proposal. So what is a secured credit card, how do they work?
Diane Cunha: So secured credit cards are – basically it’s a deposit. You pay a deposit to a credit card company, you say “Listen, you know –” They look at numbers, they don’t care that you had a relationship breakdown, that you have mental health, that something happened in your family – they don’t care. It’s all about money and risk. You are high risk because your credit’s not good. So, what they say is “Give us $300. We’re going to put this 300 into an account, we’re going to leave it there and we’ll give you a credit card for 300.” You have to build that trust so if you don’t pay your balance, they’ll take that 300 and close off your card and they’re not out any money. So essentially it’s putting a deposit down and protecting themselves because they don’t know you and they don’t really care.
Doug Hoyes: Yeah, they’ve covered their risk so they’ve got their security sitting there. So obviously that’s a way to, you know, begin to establish credit and begin to improve your credit score and, you know, everybody who listens to this podcast knows I’m not a big fan of people focusing on their credit scores. I mean again, you know, chapter 4 of the book, I talk about credit scores being for the benefit of the lender, they’re not for your benefit. But, I get it; if you’ve gone through a bankruptcy or proposal and “In the future I want to finance a car, I want to buy a house. Well I need to begin to establish credit so I’ll be able to borrow money in the future at reasonable rates.” So, let’s end the show by having you give us some practical advice on rebuilding your credit score by using credit cards.
Diane Cunha: So again, two major things everyone should remember; one, make sure you can handle the credit which means pay off your balance every single month. This is what I stress every session that people – you know, when people come in for proposals or bankruptcies and they say “How do I rebuild my credit?” and I say “Well, do you have money? Do you have savings for it? Save money first then get a credit card because then you’re not in the habit of relying on the credit card. You won’t have that ‘just in case’ type attitude of using the credit card for emergencies.” So pay off the balance, pay it off each month.
Doug Hoyes: Well, and having that cash in reserve means I don’t need to be relying on the credit card then.
Diane Cunha: That’s right.
Doug Hoyes: So I need a new pair of boots. Okay, in the past it would be ‘put it on my credit card’ now it’s ‘no, no; I’ve got the cash sitting there I don’t have to resort to the credit card.’ I get into the habit of having cash sitting there. And ultimately, if you want to rebuild and be in better shape in the future, that’s the way you’ve got to do it. It’s relying on cash and your own savings rather than relying on credit cards is the trick.
Diane Cunha: Yeah, and also proving that you don’t need all your credit. Again, the people that we see and the people that we help, you know, I say to them “Did you go to your bank? Did you see if the bank would help you?” Well, the banks don’t want to see you use your maximum. You have a $15 000 Visa and it’s maxed out at 14, $15 000; that scares them. So be careful how much you put on that card because at the end of the day when you need that help the bank is not going to help you.
Doug Hoyes: Yeah, your credit score will be better if you are utilizing a smaller percentage, not a bigger percentage. If you’re maxed out all the time, then your credit score is going to be hurt.
Diane Cunha: Yeah, so if you have a big limit, that’s fine, just make sure you pay off what you use in full.
Doug Hoyes: Excellent. Diane that’s great practical advice. Thanks for being here.
Diane Cunha: Thank you for having me.
Doug Hoyes: So let me emphasize once again that there are lots of people who survive quite well without credit cards. They use their Visa debit card to make online purchases and book hotel rooms and buy stuff; so credit cards are not essential. However, I get it; they’re convenient, they do have advantages. You just need to be smart and do everything in your power to avoid credit card debt. That’s our show for today. Full show notes including a transcript and links to everything we talked about today and a link to the video of this podcast on our Debt Free in 30 channel on You Tube can be found at Hoyes.com. That’s H-O-Y-E-S .com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.
