A Fighting Chance Finance

Let’s start with a clear statement on consumer spending. If you can’t pay off your credit card every month with income from your salary after you have already contributed to investments, you are spending too much. Spending too much means you will carry a consumer debt balance on your credit card which will be very detrimental to your finances.

Credit cards almost exclusively carry interest rates upwards of 20%, and that interest compounds daily. Interest charges on unpaid balances will be added to your outstanding balance, taking you ever further away from a paid off credit card. Furthermore, leaving unpaid debts with interest accruing is not good for your credit score.

Now that the downside of credit card debt is excruciatingly clear, you might be wondering why I use a credit card at all, let alone for everything! The answer is simple, using my credit card makes me money! There are two main outcomes of responsible credit card use: Rewards / Points and Credit Score.

Rewards / Points

If you have a credit card that does not give you some sort of benefit of use, whether that is cash back or rewards points, you should cut it up. The downside risk of credit card misuse is too great to not earn some sort of rewards program, especially when credit cards usually have an annual fee of around $120-150 just to own one.

Some people like a simple cash back rewards card, for ultimate flexibility in how to spend their rewards. An example is the Scotia Momentum^® Visa Infinite^* Card. It gives you 4% cash back on groceries, 2% on gas and transit costs and 1% on everything else. If you’re a prudent financial person and eat in mostly (groceries), 4% is a big deal. You probably spend at least $300 per month on groceries, or $3,600 a year. You just earned $144, which pays for the card’s $120 fee and another $24 of gravy. On top of that, you’re probably earning another $50-100 per year on other spending, more if you use your personal card for business expenses (technically rewards points from using your personal credit card for business purposes are taxable benefits you have to report on your tax return – just letting you know).

Other people like to pick a rewards card that is geared towards a certain reward program, like travel points. Take the BMO World Elite^®* Mastercard^® for example. It gives you 2 BMO rewards points for every dollar you spend on the card. If you can spend $2,000 per month on your card (and pay it off in full remember), that’s 48,000 points a year. A flight from Toronto to London is 72,000 points. That flight costs around $700 in normal fare, so that means each point is worth roughly $0.01. Again, around a 1% reward value just for using the card.

The more you spend, the more you earn. Therefore, I try to squeeze every possible payment I can onto my card, from groceries, gas, travel, restaurants and retail shopping all the way down to $1.50 coffees from Tim Hortons. Everything.

Credit Score

Credit Score and Credit Cards share a word for a reason. Your habits when it comes to using credit for spending directly correlate to your credit score. If you pay your balance on time and in full, your credit score benefits. If you don’t pay your balance in full and on time, your credit score suffers. In fact, even having multiple credit cards hurts your credit score, which makes sense to me. Why would anyone need more than one credit card unless one has been maxed out and they need more expensive credit. Only have one credit card – it will help your credit score and it will also help you focus on getting as many reward points as possible as discussed above.

But why should you care about your credit score? This is a tough one for many younger people to understand when the only “loan” they have is their credit card. Well, the answer is that one day you’ll want to borrow money for one reason or another. You may want to go to graduate school to boost your earning potential and job prospects. You may need a vehicle for work. You may want to purchase a home for a growing family. You may want to purchase an investment property.

When the bank goes to “underwrite” your loan, one of the primary tools they will use to determine your credit worthiness is your credit score. In essence, the loan officer wants to know whether you have a history of paying back your debts in full and on time. The lower your credit score, the less likely the loan officer is to approve your loan. Even if you do get the loan, the bank assigns your interest rate based on your risk level, so a good credit score can work towards achieving lower interest rates on future loans.

In essence, a good credit score opens up opportunities to acquire assets earlier and less expensively.

Summary

Now you can see why responsible use of a credit card can do wonders for your financial picture. The key word being responsible. If you don’t have the self control and discipline to monitor your spending regularly such that you can pay off the balance each month, tread lightly. Credit cards have been financial nightmares for many-a-people – I don’t want you to be one of them.