Credit cards can be useful financial tools, but as with any tool, you get the most value when you know how to use it correctly.
If you’re a new credit card user, or branching out into the world of credit card rewards for the first time, be on the lookout for these costly-but-common mistakes.
And don’t worry if you’ve already experienced a few of them — most are fairly easy to correct once you know they’re happening.
1. Hanging on to your starter card
Many people start off with a student credit card or secured credit card. And while there’s comfort in sticking with the card you know and understand, there are good reasons to upgrade as soon as you’re financially able.
Once you’ve established a good credit score and history of on-time payments, you could have access to cards that offer rewards like cash back and points, as well as other free perks like travel insurance, generous welcome offers and concierge service. Though you may have to pay an annual fee to get a card with premium rewards and benefits, there’s still plenty of no-fee credit cards with enticing extras.
Fix it: Look for a flat-rate cash back card that can ease you into the world of rewards without a lot of complicated categories to track. Or consider a low or no-fee rewards card to earn points that are redeemable for things like merchandise, travel and gift cards.
Keep in mind that whether you accept an upgrade offer from your credit card issuer or are applying for a new card with a different card provider, upgrading doesn’t mean you have to get rid of your starter card. In fact, doing so could have a temporary negative impact on your credit score by reducing the average age of your accounts while increasing your credit utilization rate.
2. Carrying a balance
Even the most conscientious credit card user may have difficulty paying off a balance in full every once in a while. Yet with the high interest rates most credit cards carry in Canada (19.99% is a typical purchase rate), it’s best to avoid carrying a balance if possible. Because of the way credit card interest is calculated, making only the minimum payment will actually fuel debt growth rather than helping you to pay it off — you’ll end up owing much more than you borrowed. This can start a vicious cycle that causes stress and damages your credit score.
Fix it: If you’re struggling to make headway on your credit card debt, the first thing to do is stop adding to it if you can. You might also consider transferring your balance to a lower-interest credit card that can give you some breathing room.
Depending on your situation and credit score, you may be able to move your debt to a card that offers rates as low as 0% for a limited period — so your entire monthly payment goes to the principal during that time.
3. Leaving bonus or intro offers on the table
A generous credit card bonus offer can be hard to resist, which is exactly why issuers use them to attract applicants. Yet it’s important to pay close attention to the fine print.
In Canada, most credit cards have a few hoops that new cardholders must jump through to claim the intro offer. One common requirement is that you spend a certain amount on the card — often thousands of dollars — within a matter of months. If you fail to meet the conditions of the offer, you’ll lose out on what could have been significant extra value.
Fix it: Fully understand any intro offer conditions before applying for a credit card, and if you’re not sure you’ll meet them, for staying power rather than flash. Look for a card with a strong ongoing earn rate that matches your everyday spending habits versus a big one-time bonus.
4. Hoarding your points
Because reward card loyalty programs can have complicated and inexact redemption schedules, an overwhelming choice of redemption options or varying point redemption values, some people opt to let points pile up rather than figuring it all out. In doing so, they may lose out on valuable rewards like free flights and merchandise.
Fix it: Make a plan to use your rewards on a quarterly basis (unless you’re aiming for something big, like international flights for you and a friend).
Loyalty programs like Air Miles, Aeroplan and RBC Rewards often have their own websites with detailed information about redemption options and ways to maximize your points. Or you can always reach out to your credit card issuer with questions about features and limitations.
Either way, remember rewards points can expire. If your points are gathering dust, or you’ve lost them due to lack of use, you may want to opt for a more straightforward cash-back card instead.
Making only the minimum payment on a credit card keeps you in debt longer and racks up interest charges. It can also put your credit score at risk.
A balance transfer credit card offers a low interest rate (or even 0% interest) to entice you to move your balance over from another card. But there’s a catch.