Doug is a guest writer at First Foundation and the Founder & Trustee of Hoyes, Michalos & Associates
Credit cards are a normal part of most Canadians' lives, and while they're incredibly convenient — and can even offer consumers a way to make money — they can also put a serious dent in your finances if you're not careful.
Let's look at some numbers: 93 percent of insolvent debtors we have worked with owed money on several credit cards at the time they sought debt relief. Their average outstanding balance was $25,400. This isn't a coincidence. Credit cards are dangerous for people who have a hard time managing their money – and having a stack of them in your wallet can be financial suicide.
Danger in Numbers
Some people may assume that having multiple credit cards is a good thing, arguing that they're building their credit score or accruing valuable rewards. However, there are many reasons that having an overabundance of credit cards can be dangerous for even the most careful consumer.
For one thing, it's much easier to forget to make a payment when you have multiple bills to keep track of. You may also lose track of the balance on one or two cards, which can in turn throw your budget completely off balance. Having multiple cards with high credit limits can give you the feeling that you have more money when in fact you're spending much more than you even realize in fees. As convenient as it is to whip out your plastic and say "charge it," ultimately that practice can become detrimental to your finances. In addition, if you apply for a new card and you're rejected, it will negatively impact your credit score.
Credit cards really aren't evil if you pay off your balance each month. That is how they should be used, but unfortunately that's not the way most people use them — and the credit card companies count on that. A recent survey by Harris Decima showed that 38 percent of Canadians are currently carrying a balance on their credit card, and of those, nearly half always or often carry a balance.
People who consistently carry a balance typically do so for one of two reasons:
- They think the minimum balance is all they need to pay
- The minimum balance is all they can afford to pay
Of the first group, the problem often comes down to a lack of knowledge. They simply may not realize how much carrying a balance really costs. Here's an example: A typical bank credit card charges an average of 18 percent interest on the outstanding balance. You use that card to do your Christmas shopping, spending $500. You pay the minimum balance on your next statement, and suddenly that $500 shopping spree balloons to $590.
Let's revisit the fact that the average insolvent debtor we work with has carried a balance of more than $25,000. That's nearly $5,000 in interest each year!
Another significant issue with carrying a credit card balance relates to how it impacts your credit score, which is this: very negatively. And don't assume that you can "kite" your cards, using different ones to pay off the others, essentially rearranging your balances. Credit reporting agencies will recognize your tactics and your score will suffer for it.
The bottom line is, maintaining a balance on your credit card may be convenient, but it will only make your debt grow – and faster than you might imagine. The more you buy, the more you spend on interest, and the sooner you'll get to the point where it's not a matter of paying the minimum because you want to – it's paying the minimum because that's all you can afford.
The good news is, you can dig your way out of debt no matter how deep you've gotten. If your debt is still manageable, it's simply a matter of paying off your cards one at a time — starting with your smallest balance — and closing all but one or two accounts to avoid future temptation.
It may take some time to get your balances down to zero, but if you're able to chip away a bit each month, you will eventually reach your goal. The key is to stop using the cards for unnecessary purchases, which simply continues the cycle of debt. Restrict yourself to using only one card, and put the others away in a drawer until you've paid them off. Then you can enjoy the satisfying feeling of cutting them to pieces when you close the account.
If your balance continues to grow each month despite your best efforts, and you find yourself late or even missing payments, it may be time to seek assistance.
One option is consolidating your debt, which may allow you to pay off your debts sooner. A debt consolidation loan combines several high interest debts into one lower interest loan, lowering monthly payments. There are risks if you don't meet your payment terms, and some people may not even qualify, but it is worth pursuing if you want to avoid a more extreme option.
However, sometimes the more extreme option is the only one available. If you literally cannot pay off what you owe at any point in the future, you should consider either negotiating a consumer proposal or claiming bankruptcy. Both options will eliminate all credit card debt as well as other unsecured debt including bank loans, payday loans, and tax debts. This debt calculator may help you decide which option is right for you.
Ultimately, if you feel like you're drowning in debt, don't be afraid to reach out for help. Financial experts are available to meet with you, assess your situation, and help you come up with a plan to get back on your feet financially.