Should I get a credit card?

Should you get a credit card? That’s a big question and there’s no short answer. Before you make the decision to get a credit card, there’s a lot to consider. Let’s dig into it.

On the one hand, a credit card offers you convenience – you have approved access to money that you can borrow from your bank, whenever and wherever you need it. A credit card can also provide additional benefits, like credit-building and spending rewards like airpoints and cashback.

On the other hand, a credit card can easily lead to overspending, which can spiral into financial debt. Whatever money you spend on your credit card has to be paid back to the bank. And if you’re slow to pay back what you borrow, you’ll end up paying a lot more than you borrowed. Irresponsible spending on your credit card can harm your credit score and result in additional bank fees and repayments.

So, credit cards are not for everyone. There are pros and cons and you need to do your research. They can be incredibly helpful tools when used correctly. But, if used irresponsibly, you could quickly end up regretting your decision to get a credit card.

Before applying for a credit card, you should ask yourself these five questions.

Are you able to pay the balance every month?

If you repay your purchases and clear your credit balance on time every month, you won’t pay a cent in interest. That’s where the real beauty of a credit card is – the ability to borrow money you don’t have right now but that you can repay quickly. This way, you earn all the rewards of a credit card without paying additional money in interest.

Most credit cards carry high interest rates because they’re considered unsecured credit. The interest annual percentage rate (APR) is often around 20%. If you were to carry a $1000 balance on your card without paying it off, you would owe an extra $200 in interest over a year.

As long as you make your monthly repayments on time, you’ll never pay any interest and will have been rewarded for your spending. If you’re unable to make your payments, that’s when there will be trouble.

In the wrong hands, a credit card is a recipe for spiraling debt. Because they’re so convenient, it’s easy to get carried away buying things that you can’t afford and can’t repay. When the interest kicks in and you still can’t afford your repayments, your debt will quickly go from bad to worse. Despite conflicting financial advice, you should not keep a balance on your credit card – it doesn’t help you build credit.

Are you able to meet the requirements?

There are eligibility requirements to get a credit card. Different cards have different eligibility criteria, as you would expect. Though there are a number of technical criteria, we’ll highlight just a few here.

Your credit score is one of the main factors. You need a good or excellent credit score to be considered for most credit cards (if you have a poor score or limited credit history, there are other options like secured credit cards and credit card alternatives, which you can read about below). The better your credit score, the better the type of card and credit limit you will be approved for.

Your income level is another factor. Banks need to know you have regular income (often, but not necessarily, from employment), that will allow you to repay any debt you accrue on your credit card.

Other criteria include your age and location. Physically, to be eligible for a credit card in Canada, you need to be a Canadian citizen or resident. And you need to be the “age of majority” in your home province. The age of majority is a term meaning legally an adult. The age of majority is 18 or 19, depending where you live.

Are you trying to pay off debt (from another credit card)?

If you happen to dig yourself into a financial hole with one credit card, in the right circumstances it may help to apply for a second credit card to help ease the burden of the first.

Transferring your debt from a high-interest card to one with a lower (or zero) interest rate can help you get back on top. What you’re looking for in this scenario is a “balance transfer credit card”.

With a balance transfer credit card, you’re able to transfer your debt from your current card (which could be charging 18% interest, or higher) to a new card with a lower interest rate. In some cases, you’ll be able to find credit cards offering promotional rates of zero interest for a set period of time, often about 12 months.

With no interest compounding the debt you already owe, a balance transfer credit card can help you pay off debt faster. During the interest-free period of your new credit card you pay back just the money you owe – without monthly extras.

You’ll generally need an excellent credit score to be considered for a balance transfer credit card.

Are you trying to build credit?

Credit cards are an excellent way to build your credit history. With regular purchases, regular repayments, and ensuring you’re keeping your balance low, you can build your credit history in no time.

Your credit score proves to lenders how trustworthy you are to repay a debt. The higher your credit score, the more likely lenders are to lend you money. Your credit score is based on a number of factors, including how many bank accounts you have, how much debt you have, and your repayment history. You need a high credit score if you want to be approved for a mortgage, a loan, and other credit cards. Many landlords will also check your credit score before approving you for a rental property.

When you apply for your first credit card, you may have a relatively low credit score. Starter credit cards may have smaller limits (about $500). As you use your card and prove that you can be trusted to make repayments on time, your credit score will increase. As your credit builds, banks are more likely to offer you new cards with higher limits.

If you have a poor credit score or limited credit history, you may need to first apply for a secured credit card – these work much like regular credit cards but you need to put down a cash deposit with the bank, which is held as collateral against the credit they offer you. Secure credit cards have fewer rewards than traditional credit cards but are a great financial stepping stone to help you build your credit score.

While credit cards can help you build credit, they can also harm your credit score if used poorly. So, you need to ensure you’re doing it right – spending within your budget and making repayments on time.

There are other ways to build credit, if a credit card is not right for you. KOHO’s Credit Building helps build your credit score in as little as six months. You could also look into becoming an authorized user on another person’s credit card.

Are you making a big purchase soon?

If you’re planning on applying for a major loan to purchase something expensive like a house or a car, you might want to hold off on applying for a new credit card until after you’ve been approved for that big-ticket item. Applications for a credit card result in lenders making a “hard pull” or “hard inquiry” into your credit score – and these actually cost you points on your credit score.

You want your credit score as high as possible when applying for large loans and mortgages, so that you qualify for the best rates. A “hard pull” at the wrong time could lower your score and reduce your chances of getting the best mortgage or loan.

However, if your upcoming purchase is smaller than a house or a car, a credit card could be beneficial. Say you’re looking to buy something that you already have the cash for, or have budgeted and know you can pay off within a month or so – for example, a new television, laptop, golf clubs, university textbooks, enrolment in a course – then making that purchase on a credit card would make sense. You would earn the rewards points from the purchase, and you’d be able to pay off the credit balance immediately without incurring any interest.

KOHO: A credit card alternative

If you think a credit card isn’t the best choice for you, there are other options.

With the KOHO prepaid mastercard you have all the convenience of a credit card, but without the risk of going into debt. It’s reloadable, meaning you’re only ever spending your own money, within your own limits.

And, if you’re looking to build credit but don’t want or don’t qualify for a credit card, KOHO has you covered there too. With KOHO's Credit Building, it’s easy to build your credit in just six months by making small on-time regular payments.

Final thoughts on if you should get a credit card

Credit cards are tools – and just like other tools, they can be used well to help or used poorly to harm. If used responsibly, credit cards are a wonderful tool that offer you more financial freedom. But used irresponsibly, they can very easily lead you into debt. And just like many other tools, you need to understand the tool and how to use it before you pick one up.