0 comments on “All You Need to Know About Credit Cards”

All You Need to Know About Credit Cards

Guest Post: Samuel C.

All_About_Credit_Cards

Which credit card is right for me?

There is no definitive answer for this question. Each person is different and that is why there are many credit card targeted for different customers. I will cover the most frequently used ones, however the important part is that before applying for any credit card, please consult GreedyRates for best offers currently available.

Now, let’s talk about the available options:

For Students:

  • You are new to the credit card world and you want to start building your credit background. Well there are a few credit cards for you. Those cards are easy to get and does not have any special requirement. They do not have any annual fee, carries small perks and rewards. They also have small credit limit. My favorite student card is BMO Mastercard SPC Cashback

Bad Credit

  • For whatever reason, if you have bad credit and you want to rebuild it, these credit cards are for you. They are what we call secured cards. You need to deposit some cash to your card issuer before they can give you a card. Should you default on payment, they will use your deposit as payment and cancel your card. When you have this kind of credit card, you cannot allow yourself to default on payment. Any bank will offer this product. My favorite one is Capital One, one of the easiest to obtain. Some card issuers require full limit deposit (500$ deposit for 500$ limit) and some of them requires a percentage. (50$ for 300$ limit). After 12 consecutive months of good payment and behavior, they will refund your deposit and upgrade your credit card to a non secured one.

For Salaried Class

  • Depending on your preferences there are many cards which are available for you. The rewards are usually travel, cashback, points etc. These credit cards also carry many benefits such as insurance, fraud protection, extended warranty etc. There are many people using credit cards as a way to get free stuff/travel. It’s called churning. And I will talk about it later.

Business Owners

  • If you are a business owner, you should seek business credit card. These cards carry many benefits with many companies. Their annual fee is tax deductible. The reward could be discount, higher point reward per dollar purchase. They also have high credit limit. Amex offers some of the best business cards.

As always, please verify and compare before applying for a credit card.

Should I accept a pre-approved credit limit increase?

Yes! This will lower your credit utilization ratio, on the card and overall, therefore improving your credit score. However, if you think you will spend more or spend out of your means, please do not accept the limit increase. Remember the money you charge to your credit card is borrowed. High credit limit does not mean you can afford it.

However if your credit limit is very high, sometimes some lenders might ask you to lower the limit on your current credit product before accepting your application. This can happen when you apply or renew your mortgage. The reason behind this is because credit limit counts as available money at your disposal. So if you suddenly spend 90000$ in credit because of any xyz reason, then you can’t pay back all. Their risk tolerance does not allow them to give you additional credit if you already have too much.

Should I accept a pre-approved credit card?

Depends. Some pre-approved credit card does not require a hard pull from your credit report. You can always call the card issuer to ensure that no hard pull will be done should you accept the card. A pre-approved card is issued to you because they’ve already done a soft pull either for marketing purposes or targeted advertising and they’ve determined that you are within their risk tolerance. If you think you can manage properly and the new card has attractive benefits for you, then Go for it! The only downside is that the short term credit score drops. (Your average age of trade is now lowered).

Should I cancel a card that I don’t use anymore?

Yes and no. Remember, you should never cancel your oldest credit card. That card is very important for your average age of trade. It helps greatly for your credit score. You should keep it and keep it active (Buy a pack of gum every few months). If the card has an annual fee, then you can call and ask them to convert the card to a non fee one.

You should cancel the card if the card’s age is lower than your average age of trade or you cannot manage multiple cards and might forget a payment…

Upgrading, downgrading, merging credit card

It is possible to upgrade, downgrade and merge multiple cards with the same card issuer. This usually does NOT necessarily involve a credit check.

When upgrading and downgrading, you need to ensure that they use the same account but just have different card type. Upgrade and downgrade does not affect your average age of trade nor does it affect your credit limit. Your spending power stays the same with just a different product.

Merging credit card happens when you have 2 or more credit cards with the same issuer. Instead of managing all of them, you just want one. When merging, card issuer will add up all the available credit limit and combine it to 1 card.

What to do if my credit card application is denied?

You can and should appeal your case by calling their customer center. They will usually give you a general indication as to why your application is denied. You can always ask if there is anything you can do to get your card approved.

My credit card’s credit limit.

Your credit card’s limit is calculated by an algorithm by each card issuer. All of them have different algorithms, so you can also call this as risk tolerence. Generally speaking, the higher the income you have, the higher limit you will be granted. Premium credit card such as World Elite from Mastercard and Infinite & Infinite Privileges from Visa does not have maximum limit but does have a minimum limit. Ordinary cards’s minimum limit is usually 300$. But this is often not written.

For every limit increase request, they will do a hard pull from your credit report. However sometimes there are pre-approved limit increase as stated above that does not require a hard pull, because your card issuer considers you very trustworthy. You can also request a limit increase without a hard pull. They will sometimes agree to do it or may deny it. The best way to know is call in. If you are requesting a limit increase on your card issuer’s website, it will automatically be a hard pull.

For limit decrease, there is no credit check involved. Credit limit decrease can be done at anytime without any questioning.

What is a charge card?

The major charge card issuer in Canada is Amex, a charge card must be paid in full every month. It has amazing welcome bonuses and rewards. Charge card does not have a preset credit limit, but that does not mean you can spend whatever you want to. Charge card issuers will authorize the transaction case by case. The “invisible limit” is set by your credit file and your spending behavior. You can call the card issuer to give you an approximate limit of your charge card.

If a charge card is not paid on time and/or the balance is not paid in full, you will be penalized heavily. It carries a 30% interest rate vs 19.99 of credit cards.

For the curious, you can read on American Express Centurion (AKA, Blackcard)

What is Churning?

Many credit card companies offer attractive welcome bonuses so that you can become one of their clients. Churning is getting those welcome bonuses and then once you get them, cancel the card and go for next one. These welcome bonuses usually range from 200 to 600$ in terms of cash value. People trade a credit check for those cash. Churning is delicate and needs to be done with precaution. Obviously it opens many accounts in same time and lower your average age of trade. If you are in need of a loan or mortgage, you should not churn 1-2 years before the due date. When churning, it is important to know your credit background and score and also know when to stop before you receive negative impact.

How do I redeem those rewards from my credit card?

Reward redemption has different rules. You can sometimes redeem monthly, yearly and sometimes at your will. You can always find this information from the card issuer’s website or your card’s brochure.

Credit card billing cycle & how to pay?

For instance, you opened your credit card on the 1st of a month, your billing cycle will be 1st of each month to the last day of each month. And on 1st of each month you will receive your bill. When you receive your bill, you will have a grace period (interest free) of 21 days to pay your balance. During this time, you must pay all your balance of your previous bill in full. Remember it is 21 calendar days and not 21 business days. (The due date is always written somewhere on the bill). If you do not pay in full, the rest of balance will be carried over to the next bill and interest will be levied.

It is also recommended to always let your credit card report a balance to credit bureau. Otherwise the credit bureau will ignore the credit card in the score calculation. (partially, due to credit limit counts toward the overall ratio utilization).

Can I have a credit card with a bank that is not my bank?

Yes, you can apply for a credit card at any credit card issuer. To pay the credit card, you simply need to find the bill name for the card issuer and the account number is always your card number.

What to do if I have credit card debts?

Credit card debts are the worst debt in the market. At 20% and 22% interest rates, you could lose money very fast. These are the general rules you should follow.

  • Budgeting, cut all unnecessary expenses. Earn additional income if possible.
  • Cut your credit card and spend money only on debit or cash.
  • Seek a way to pay your debt. (Consolidation loan, balance transfer, payment plan with card issuer etc.)
  • See below:

Consolidation loan is offered by bank to help you to pay back your debt at lower interest rate, and it is a personal loan.

With Balance Transfer, you can transfer your current card’s balance to a new one and apply for a new card.

With Payment plan, you can negotiate a deal with your card issuer and schedule a payment plan. Just like consolidation loan, there are terms and conditions you need to abide by.

How to be a responsible consumer?

Ask yourself these questions whenever you are about to purchase something.

  1. Is this something I absolutely need?
  2. If I need it, is there a cheaper alternative that is as good as this one?
  3. If it’s non essential for living, is it a luxury? If it’s a luxury, can I afford it? (If you need a payment plan or loan then you can’t afford it)

0 comments on “How to read your Paycheque”

How to read your Paycheque

Paycheque

Before you dive into budgeting, saving, and investing, it’s important to make sure that you know how to read your paycheque. After all, we can only save and invest money that we’ve earned in the first place.

Here, we’ll dig into these key concepts:

  • Gross salary
  • Taxes
  • Deductions
  • Net salary (also known as take-home pay)

Gross Salary

When people talk about their annual salary (e.g., $40,000 per year) or hourly salary ($20 per hour), they are almost always talking about “gross salary”. This is the headline number that appears on your employment contract.

This figure is only a starting point.

Unfortunately, the money that appears in our bank account after each pay day is lower than what our gross salary would suggest. Think of your gross salary as the entire pie. After taking off slices for taxes and deductions (discussed below), the remainder is of the pie is what actually gets deposited into our bank account.

Taxes

It’s morbid but true: ’Tis impossible to be sure of any thing but death and taxes.

When you earn money from your job, your employer will automatically subtract taxes off of your gross salary (boo). Your employer sends this money to the government on your behalf.

The main form of tax taken off from your paycheque is income tax. The amount of income taxes you pay are based on the concept of “tax brackets”. As your income gets higher, the percentage of your income that you pay in tax increases — but only on the extra portion.

Here’s an overview of Canadian income tax brackets:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html

Side note #1: It’s a common misconception that you should try to stay below certain income levels, since shifting into a new tax bracket would reduce your overall take-home pay (i.e., higher salary but lower money coming into your bank account at the end of the day). This is absolutely NOT true.

When you move into a higher tax bracket, it’s only the money earned within that new bracket which is taxed a the higher rate, not your entire salary.

However, you may see a higher amount of tax withheld (see below) when you have a big, unusual paycheque (e.g. a bonus), because of the way tax withholding is calculated for paycheques.

Side note #2: The taxes taken off your paycheque are a “withholding” tax, meaning that they are just an estimate of the amount that you should owe. At the end of the year, the actual amount of taxes that you should have paid will be calculated on your tax return. The resulting difference between what you paid and what you should have paid will be settled at that point (either through a tax refund or additional taxes owed).

Keep this in mind if you see something odd happen with your taxes on your paycheque (for example, when you receive a bonus). You will always get “trued-up” at the end of the year.

The bottom line: the higher your income, the more tax you pay. However, making a higher income will always increase the pay that hits your bank account.

Deductions

Depending on what company you work for, you may have other deductions that are taken off of your paycheque. These could include contributions to an employer stock option plan, an employer pension / retirement savings plan, or an employer health plan.

When you were first hired, HR may have given you forms to sign up for an employer retirement savings plan (often known as a “Group RRSP” account in Canada). If you signed up, you’d be contributing a portion of your paycheque towards these savings plans (e.g., contributing 2% of each paycheque towards that account).

These amounts are deducted directly from your paycheque. As such, this money never arrives in your bank account. Instead, it’s held separately in a different account.

Net Salary (Take-Home Pay)

Gross salary is the full pie that we start with. After taking off a slice for taxes, and another slice for deductions, the amount of the pie remaining is what’s known as net pay or take-home pay. This is the amount of money that actually gets deposited into your bank account.

Your take-home pay is the most important number for you to know, since ultimately this is the money that you have control over. This is the money that pays the bills or gets saved for the future.

Knowing the amount of money that you take home each month will serve as a key input for your financial plan.

An Illustrative Example

Let’s take an example from a hypothetical Canadian paycheque:

Paycheque

  • For these two weeks, John earned a gross salary of $1,140 (regular pay plus overtime pay)
  • John paid total taxes of $239.97. This consisted of income tax, employment insurance (EI), and Canada Pension Plan (CPP) payments
  • John also had deductions of $104 for health insurance, registered pension plan, union dues, and Canada savings bonds
  • As a result, John had take-home pay of $796.03 for these two weeks ($1,140 minus taxes of $239.97 and minus deductions of $104)
  • John’s average tax rate was 21% for this paycheque (total taxes of $239.97 divided by gross pay of $1,140)