Financial Literacy Series: Your credit cards can work for—or against—your financial goals. Learn how to manage them successfully.

Credit cards seem to hold a lot of power—from providing safety and security to presenting financial danger. But they’re just little pieces of plastic. In truth, it’s not the credit cards themselves that are in charge. The power is in the hands of the user.

“A lot of people are very debt-averse, which to some extent makes a lot of sense,” says Ted Rossman, an industry analyst at creditcards.com. “But some people avoid credit to their detriment.” The unintended consequence of avoiding credit altogether, adds Rossman, is that you may have trouble establishing credit down the line.

There’s no better time than Financial Literacy Month to learn more about out how to make the most of your credit, starting with the basics:

Understanding how credit works

Your credit score is a three-digit number that lenders use to assess your creditworthiness, meaning it gives them a sense of the likelihood that you’ll pay back a loan or pay your bills on time. Used responsibly, establishing and maintaining a good credit score (670 or above) can improve your financial life and help you reach your goals.

Consider that 41% of Canadians have a credit limit of $10,000 or more, according to the Bank of Canada. That’s a lot of people with a lot of room to rack up debt each month. Let’s say you’re carrying a balance of $1,000 on a credit card with a standard Annual Percentage Rate (APR) of 19%. If you’re committed to paying off the $1,000 in a year and made equal payments every month ($92 x 12 months), you’d owe about $105 in interest alone. That’s $105 you could be squirrelling away toward a long-term financial goal, like buying a car or a house.

As long as you carry a balance, that interest keeps compounding—meaning you’re charged interest on that interest. And if you keep charging $1,000 a month and only pay the minimum balance, you’re ultimately getting closer to your credit limit, making it more difficult to climb out of debt. This could lower your credit score and hurt your prospects of getting a good rate on a mortgage, a personal loan, and more.

But the flip side is that if you were to charge $1,000 on a card with a $10,000 limit and pay it off each month, you’d be better poised to qualify for a new line of credit and low-interest rates on auto loans or a mortgage. With good credit, you’re also better positioned to rent an apartment, get a job if a prospective employer pulls your credit, and save on mobile phone plans. So the question you probably have is, how do you achieve that perfect balance?

Cracking the good credit conundrum

How can you find that sweet spot between using too much credit and not enough to meet your long-term financial goals? These best practices in credit management can get you one step closer:

• Just get started: There’s no one right way to start building credit. “It could be a secured card, a student card, or getting on a parent’s account as an authorized user,” says Rossman. But to learn to use credit responsibly, you need that first line of credit.
• Pay your bills on time: Always pay your minimum balance, and if possible, pay your balance off in full each month. Setting up automatic payments can also help so that you’ll never miss a payment or be hit with a late fee.
• Connect with your creditor: If you think you’ll have trouble making a payment during a given month, don’t ignore the bill. Try calling your credit card company and explaining your situation. They may offer you a one-time extension.

Maintaining your good standards

Once you’ve established good credit, it’s all about keeping your utilization rate, or your credit-to-debt ratio, on the low side. Here’s how to do it:

• Don’t max out your cards: Experts recommended using 35% or less of your total line of credit. That means you should carry a low balance from month-to-month, or avoid carrying one at all.
• Make small payments throughout the month: If you have a $5,000 limit and you make $4,000 worth of charges in a month, it still looks like you’re using 80% of your credit—even if you pay your bill in full each month, explains Rossman. Making small payments throughout the month can knock that ratio down.
• Regularly check your credit report for errors: You’re entitled to one free credit report annually from each of the two credit bureaus, Equifax Canada and TransUnion Canada. If there is an error on your report, it can drag down your score. So be sure to check your reports regularly.

Using credit to reach your personal goals

Once you’ve got the credit basics down, it’s time to start educating yourself on how credit cards can actually help you reach your goals. That’s how you’re going to build up to that good or excellent score that will get you better interest rates and help you save over time. “A lot of this really falls on us as individuals,” says Rossman. “There’s not a great blueprint out there.” But there are effective strategies to try. For example:

• Only use your credit card for planned purchases. “Try to avoid using your credit card as an emergency fund,” says Rossman. In general, it’s important to budget for large credit purchases, like a new TV or home upgrades. If you do need a little extra to bridge the gap one month, that’s where your savings should come in.
• Limit the number of open credit cards and applications: “You may be excited that you’ve built up a pretty good credit score, but you don’t want to run too many applications at once,” says Rossman. “That can make you look risky.” He suggests spacing out one application every six to 12 months.
• Plan for the unexpected: Miscellaneous purchases, like an impromptu round of drinks or a replacement coffeemaker if yours breaks, are inevitable. But be prepared for these small purchases by factoring a spending cushion for miscellaneous items into your monthly budget.
• Find a rewards card that aligns with your spending habits: Rewards and cashback cards are most valuable when they match your spending priorities, such as groceries, travel, or other frequent purchases. Make sure you’re choosing a card that furthers your financial goals, not just increases debt. Don’t hesitate to take advantage of these rewards programs-they’re well worth your effort. For example, if you spend $1,000 per month on your card, pay off the balance each month on a 1% rewards program, that’s $120 back.
• Look out for hidden charges or annual fees: Rewards cards tend to carry an annual fee—and that’s in addition to regular interest charges. If the costs cancel out the savings from the rewards, look for a better option.

Know your financial strengths and weaknesses

When it comes to credit, what’s really important is to know yourself, says Rossman: “If you’re the kind of person that’s going to be really disciplined, then it’s okay to use your card for everything,” says Rossman, adding that some people use credit for expense tracking and budgeting. However, if you know you might not keep up with credit, it’s best to stick with cash or debit for most purchases.

Remember, building credit can take time so don’t beat yourself up if you don’t have a great score—or any score at all. No matter where you are in the process, give yourself some credit.

Whether you want to establish a credit history, find a low fixed interest rate, or take advantage of a straightforward rewards program, Coast Capital can help find a card that’s right for you.