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by Janet Doyle
Apple and Sephora recently announced they will begin issuing credit cards later this year and are offering users attractive rewards programs. Apple has said the new credit card will have no late fees, no annual fees and no international fees in addition to a points-based reward system for transactions. Sephora has yet to announce the specifics of their credit card terms, but it’s being sold as “taking (Sephora’s) client experience to the next level through special access, rewards and perks”.
There are many credit cards that offer incentives and special rewards to sign up, but most Canadian credit card holders are not aware of the impact a credit card can have on their life.
60% of those between the ages of 18-34 don’t learn about credit before getting their first credit card, and 42% learned about credit from making a mistake.
Here’s what you need to know before getting a credit card:
1. Why Do You Want a Credit Card?
A credit card is the easiest way to build credit, an essential tool for your future that will be used in accessing future home rental or ownership. It also allows you to shop online and over the phone, book a hotel, and rent a car. If you’re looking for a credit card to fund purchases beyond your budget, think twice – overusing your credit card and going into debt to finance a lifestyle beyond your means can have serious consequences on your future.
2. A Credit Card is a Short-Term Loan
When you take out a loan, you need to pay it back. If you can’t pay it back, you’ll end up paying more money after you are charged with interest and/or other fees. You should have a plan in place to pay back what you owe, just like with any other loan.
3. What is Your Credit Score?
Check your credit score before getting a credit card; your credit score is based on several factors including the number of credit cards you have so it may be affected negatively if you add an additional credit card. Because older credit accounts have a more positive impact on your credit score you may want to consider asking a current lender for a credit increase instead.
4. When is Your Grace Period?
Every month you have a grace period where you can pay back the amount in full, interest free. If you miss this period, you’ll be charged interest, and end up paying back more than you originally owed.
5. What Fees You May Be Charged
Credit Cards have a number of fees associated with them, including:
- Annual Fee: Most reward cards charge an annual fee
- Annual Percentage Rate (Interest): Charged on the balance carried over from one month to the next; typically, between 11-24%, with rewards and store discount cards often having the highest interest rates of all cards. Sometimes there is an introductory offer at a lower rate that ends after a certain amount of time.
- Balance Transfer Fee: If you move your debt from one card to another
- Foreign Transaction Fee: Typically charged in addition to the conversion rate and any purchases you make in another country.
- Late Payment Fee: Charged if you do not make the minimum payment on time.
- Over-the-limit Fee: Charged if you go over your credit limit.
- Cash Advances: Many times, there are finances charges and different interest rules applied to cash advances.
- Insurance: Some credit cards offer special protection insurance which covers damaged goods or protects your purchases in the event of death, medical disability, or unemployment.
6. What type of Credit Card?
There are two options for credit cards; secured and unsecured. A secured credit card is a smart way to build credit and available to those with low or no credit. It requires a cash deposit, typically in the amount of the card limit. An unsecured credit card does not require a deposit and the credit limit is determined by credit history and income. A secured credit card is the best option for re-building your credit.
7. The Impact of Carrying a Balance
Carrying a balance month-to-month will impact your budget and your credit score. If you are making purchases to pay for things when you are short on cash or in an emergency or to improve your cash flow without needing to wait until payday, your balance could quickly add up with compounding interest. Before making a purchase, have a plan of how you will pay the debt back, ideally without carrying a balance to the next month. If you are unable to pay it off in full, ensuring you pay more than the minimum will ease the amount you will pay in interest.
If you are struggling with credit card debt and are no longer able to afford your payments, asking for sound advice is a sign of strength and the smart thing to do. Asking sooner rather than later is always better. Try our debt reduction calculator and call Doyle Salewski today for your free, no obligation consultation. You’ll be glad you did.