Credit cards are among the most popular credit products due to their convenience and perks. Plus, they’re easy to qualify for and there are many types of credit cards for every user. That’s why almost every Canadian has a credit card. On the other hand, they can lead to serious debt, so check out these credit card pros and cons before getting one.
Credit Cards Pros And Cons: PROS
There are things that can make credit cards good and bad for the average Canadian. Let’s start with the pros so you can figure out if a credit card is the right option for you.
Convenience And Ease Of Use
Pretty much every business accepts credit cards as a payment nowadays. On top of that, most credit cards have a chip that allows the user to make contactless purchases. So, whether you’re buying something in-person or online, using your credit card is one of the fastest ways to complete your transaction, without having to carry a bunch of cash around.
Moreover, credit cards are generally easiest to qualify for, many of which offer instant approvals.
Ability To Build Credit History
Credit cards make it easy to track your purchases via monthly statements. So while it’s easy to spend using a credit card, you can also check where you’ve been pouring your money into.
Credit cards are also a credit tool to help you build your credit. In general, your credit card affects three factors that are commonly used in the calculation of credit scores. As such, depending on how you use your credit card, it could affect your credit score.
- Payment History – When you pay your credit card bills every billing cycle, it’s reported to the credit bureau(s). This can help you build a positive payment history.
- Credit History – Your credit history refers to the average age of your credit accounts. So opening and closing new credit cards can both positively or negatively affect your credit. In general, the longer you have the account open, the better for your credit.
- Debt-to-Credit Ratio – This refers to the percentage of credit used versus how much you have available. It is recommended that you keep a ratio of 30% or under.
Rewards And Cashback Programs
Many credit cards feature various perks, including cashback, reward points, and other incentives. Those perks can then be redeemed for things like hotels, flights, and food or credit. If you use your card for everyday items and pay your bills before the monthly interest is added on, your rewards can add up fast and be well worth any yearly or monthly fees.
To ensure that your annual fee is worth it. Find out how much money you’d need to spend in each spending category to break even. For example, if you earn $1 per $100 spent, and pay a $120 annual fee, you’d need to spend $12,000 to break even.
Fraud Protection And Security Measures
If you’re worried about performing certain transactions, don’t worry, since many credit cards come with fraud alerts, purchase protection, and other forms of security too. So, if your card is lost or stolen and you have those safeguards activated, you won’t be held liable for unauthorized transactions.
Some credit cards also offer extended warranties. For example, if you buy a blender that has a 1-year manufacturer warranty, it may be extended to 2 years.
Emergency Fund Source
While you probably shouldn’t rely solely on your credit card, it can definitely be a quick and safe way to cover emergency costs, like car repairs, large bills, and other scenarios where you don’t have cash on-hand. As mentioned, many credit cards feature extended warranties too. That means some items are covered if they malfunction or arrive broken.
Do note, it’s important not to rely on credit cards as a source of emergency funds as it can lead to debt problems. You should only use credit cards when you know you can repay the amount.
Offers And Discounts
As extra incentives, many credit cards come with introductory offers just for signing up, like rewards points, free bank accounts, and even cash bonuses. These are usually called a “ welcome bonus”.
Additionally, certain credit cards will give you appealing discounts on select items at participating locations. This includes grocery stores, retail outlets, pharmacies, and fuel or electricity terminals.
Variety Of Credit Cards
Another pro of credit cards is that there is a variety of them available in Canada. Each one is designed with a particular consumer in mind. Some are catered to travellers, others to students and newcomers.
Secured Credit Cards
Secured credit cards are designed to help Canadians build their credit. If you have a bad or limited credit history, this product gives you access to credit for a security deposit (equal to the desired credit limit). You can then use your secured credit card to build or improve your credit history. The deposit will be returned once you pay off your balance and cancel the card.
Newcomer Credit Cards
If you’ve recently come to Canada as an immigrant, it can be hard to qualify for a normal credit card because you may not have a credit history yet. Thankfully, there are plenty of banks, credit unions, and other providers that offer credit cards for newcomers with special rates, benefits, and discounts.
Student Credit Cards
Qualifying can also be difficult for students who haven’t had a chance to build a credit history or earn a decent income. Requirements for these cards are generally lowers and will have fewer benefits than a regular credit card. Credit cards designed for students generally have lower rates, credit limits and annual fees. Some student credit cards offer discounts and cashback on select items as well.
Low-Interest Credit Cards
If you’re someone who’s likely to carry a balance from month-to-month, you can opt for a low-interest credit card. Many providers offer credit cards with lower interest rates of around 8.99% – 13.99%, rather than the standard 19.99% – 24.99%. Although these credit cards may not provide the same benefits as those with higher rates do, they can be far cheaper over time.
Looking for the best credit card options?
Credit Cards Pros And Cons: CONS
Unfortunately, no credit product is without its downsides. Despite their benefits, credit cards can come with some significant cons to consider, including but not limited to:
High-Interest Rates And Fees
Unless you find a low-interest card, there’s a chance your credit card will have a high rate and even a yearly fee. This is particularly common with rewards credit cards. Since interest will apply to your unpaid balances, you may get charged a lot more each month than you were hoping, in addition to any penalty fees you receive for late payments.
Moreover, in recent news, it’s been announced that Canadians may be charged extra fees to use their credit card. These new credit card surcharges can cost about 2% of your purchase.
Risk Of Overspending And Debt Accumulation
Because they often have high rates and fees, credit cards can be very risky, especially if you have multiple cards or trouble controlling your spending. The real problems start to occur when you’re only able to afford minimum or partial monthly payments. This will cause more interest to pile up, which may lead to penalty fees and unmanageable debt.
Negative Impact On Credit Score
Most credit card providers will report your activity to Canada’s credit bureaus; Equifax and TransUnion. That means any missed payments can hurt your credit scores and stay on your credit report for several years. This may cause future lenders to turn down your applications, charge you higher rates, or only approve you for small amounts of credit.
Complicated Terms And Conditions
These days, most credit cards have confusing terms and conditions written in the fine print. Those limitations can put you in hot water if you don’t understand them properly. For instance, some of the insurance perks provided with your credit card will have limitations. If you don’t read it properly, you may not be covered.
Fraud And Identity Theft Risk
If you’re not careful with your credit cards, you could also fall victim to scamming and identity theft, especially if you don’t pay for fraud protection, which isn’t always included. These problems can damage your credit and be difficult to resolve on your own, so make sure to monitor your monthly statements and keep your information safe.
Temptation To Purchase Unnecessary Items
Ironically, the convenience of credit cards is one of their biggest problems too. Since credit cards are so simple to use, it can be easy to spend money on things you don’t need, like clothes, trinkets, and subscriptions. Overspending can lead to late payments, which leads to more interest and penalty fees, putting you in an unending cycle of debt.
Should You Use A Credit Card?
As you can see, there are many credit cards pros and cons, so it’s important to do research and use common sense. For starters, think about all the different factors that are involved with credit cards, including the positive and negative scenarios below.
Situations When It Is Appropriate To Use A Credit Card
- When Making Large Purchases – Some credit cards feature high credit limits, which can make them good for big-ticket items, like new appliances or furniture.
- When Traveling – No matter where or why you’re travelling, having at least one credit card on you is important, even if you only plan to use it for emergencies. If you have a travel credit card, you can also use it to book your flight and hotel to earn points. You’ll also be able to take advantage of certain perks such as trip cancellation insurance or travel medical insurance.
- When Making Online Purchases – It’s easier to cancel or freeze your credit card than it is your debit card. Moreover, credit cards tend to come with fraud protection, so even if your credit card information is stolen and someone makes an unauthorized purchase, you’ll be covered.
- When Building Or Improving Credit Score – Credit card activity is reported to credit bureaus, so paying your bills on time can help improve your credit score.
- When Earning Rewards Or Cashback – If you frequently use a rewards credit card, you can rake in tons of perks, like cashback, discounts, and bonus points.
- When Needing A Financial Buffer – If you don’t have enough cash, credit cards allow you to deal with expenses upfront and only pay them off at a later date. However, a credit card should only be used to cover small emergencies. If you need a long time to pay back the money, a personal loan may be a better option.
Situations When It Is Not Appropriate To Use A Credit Card
- When You Can’t Pay Off The Balance In Full And On Time – If you’re unable to make your credit card payments, it can cost you in many different ways. It can lead to high-interest charges and late fees. It may even hurt your credit.
- When You Are Already Struggling With Debt – If you have other debts you’re struggling to repay, using your credit card can make your financial situation worse. Adding more debt to the books will only make it harder to repay.
- When You Have A Spending Addiction Or Lack Self-Control – If it’s hard for you to budget and save money, a credit card can lead to overspending. Unlike cash, it’s hard to limit how much you spend.
- When Making Purchases That Are Not Essential – Since credit cards lead to a lot of interest, it’s better to only use them for necessary expenses, like groceries. Or when you know you can repay the amount in full by the next billing cycle.
Not Sure If A Credit Card Is The Right Payment Method For You?
If you’re uncertain about applying for a credit card, it may be smarter to hold off and do some research. Remember, credit cards have pros and cons just like any other financial product. It’s important to learn everything about them before you take on that kind of responsibility.
