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Credit Cards – Do You Really Need One?

I don’t frequently shop online, mainly because I get lost in the pages of items and end up spending way too much time contemplating between an olive green sweater or a new pair of dark wash jeans. But the other day, there was an online sale I couldn’t miss out on, so I chose a few items and proceeded to checkout. I should mention that I don’t have a credit card, and I’ve always heard that it’s frowned upon or sometimes difficult to use your debit card for online purchases. So, before entering my billing information, I decided to do some research to see if it’s finally time to sign up for a credit card.

It may be useful to define the difference between a debit and credit card, just to make sure we’re on the same page. Simply put, a debit card makes payments by deducting money directly from your checking account. A credit card is also typically issued by a bank, however, it enables you to borrow funds from that institution, with the agreement that you’ll pay the money back (potentially with interest). Usually, a customer has 30 days to pay before interest is charged on the outstanding balance, but it’s important to check because there are some cases where interest starts right away! It is important to note that credit card interest rates are notoriously high, as they are a major source of revenue for credit card companies. For reference, the typical credit card interest rate in Canada is around 19%. I encourage you to settle your balance in full each month to avoid paying interest.

Now, a discussion on credit cards wouldn’t be complete without introducing the concept of a credit score, which is a number that evaluates the probability that you will repay your debts. This score ranges from 300 to 850, with a higher score meaning that you are more financially trustworthy. There are several factors that are evaluated while calculating your credit score, such as your credit payment history, total amount owed and the length of credit history. This actually has a noticeable impact on your financial life. If you max out your credit cards or ignore your bills (a habit which is surprisingly more common than you might think!), your credit score will fall which can affect interest rates on future loans and insurance premiums.

This is not meant to intimate you from signing up for a credit card if you don’t have one already; I just want to make you aware of the negative side effects that come with irresponsible spending habits. If you are concerned about harmful credit card usage, you can remember this one golden rule: only use your credit card in situations where you could have also paid in cash (a.k.a don’t spend money you don’t have). Obviously, this is more relevant for students and young adults, as things might be slightly different when you decide to make larger purchases in the future.

Today I’ve been primarily discussing standard credit cards, but reward credit cards that offer cash back, travel points, or other benefits to customers can also be used. This is where things get a bit more interesting! Cash rewards are the most straightforward to use. Some programs allow you to redeem your cash rewards as a credit to your account, while others will send a cheque or make a deposit into your bank account when you want to redeem your reward. On the other hand, point rewards are given based on each dollar you spend (ex. one point per dollar spent). These points can be redeemed for gift cards, cash, or even travel. Lastly, travel rewards can be redeemed for airline tickets. The number of miles you can earn varies by credit card and the number of miles you need to purchase a flight varies by frequent flier program.

As you can see, there are definitely benefits associated with using a credit card, but only when it is used responsibly. This seems to be a common theme in these blog posts, but again I highly recommend doing your due diligence and researching all options before signing up for a credit card. Just because your friends and family may have one, doesn’t necessarily mean you need one too! As always, make sure to stay on top of your budget and keep your spending habits in check.