Are you struggling with credit card debt? Carrying a credit card balance is the most common type of consumer debt in Canada.
Understanding how credit cards work, their risks, and the strategies for reducing their financial burden is your first line of defense.
Even though credit cards present many financial risks, they can be an important part of your overall financial health. In order to establish a credit history and make certain transactions, you need a credit card.
Credit cards allow you to make a wide range of transactions, from retail purchases and cash advances to balance transfers, and require a minimum payment every month.
Their convenience factor and perks, like loyalty points, money-back rewards and gifts, can encourage you to pay for items on credit even when you don’t need to. It’s why credit card debt is the easiest type of debt you can incur.
Credit cards are also one of the most expensive types of debt you can have. If you carry a balance on your credit card at the end of the month, your credit card company charges you interest at an annualized rate of around 18–20%.
The higher the balance you carry on your credit card every month, the more you will pay in interest charges.
Are you only making the minimum payment on your credit cards? Sometimes, the minimum payment is all you can afford, but it’s also one of the biggest risks associated with credit card debt.
Your minimum payment is usually only three to five per cent of your total balance or a flat rate of 10 dollars, and a very affordable way to keep your account in good standing. Unfortunately, it will end up costing you more money in the end.
|Minimum payment of $10||Minimum payment of $40||Minimum payment of $50|
|Annual interest rate||18.00%||18.00%||18.00%|
|Balance||$1000||$1000||$1000||Monthly payment||$10||$40||$50||Total time to pay off||10 years||4.5 years||2 years||Total Paid||$1789||$1381.79||$1197.83|
Do you regularly make only the minimum payment and still continue using your credit card?
One of the major risks with carrying a credit card balance is spending more than you are paying off. In this case, your balance will steadily increase until you reach your credit limit or “max out” your credit card.
Maxing out a credit card is a common problem. It can be dangerous because you no longer have the safety net that credit cards provide in case of an emergency. You then become more vulnerable to riskier and more expensive forms of debt, like high-interest loans or payday loans.
A maxed-out credit card means that your credit utilization is at 100%. This has a negative impact on your credit score. An ideal utilization rate would be 30% of your credit limit.
As your balance increases, so does your minimum payment, which can add further pressure to your budget.
Without any room to make purchases, you might not be able to use your credit card.
When you miss a payment, you’re in breach of your contract with the credit card company. If you can, call your financial institution in advance and agree on an alternative payment schedule. If you miss a payment without notifying your credit card company, you risk damaging your credit score and facing a higher interest rate—often an increase of 5%.
Most financial institutions won’t allow you to pay your credit card balance with another credit card. It is possible to take a cash advance from one credit card to make a payment on another credit card, but this is an expensive transaction and will leave you further in debt.
When you take out a cash advance on your credit card, you are withdrawing money from the credit limit on your credit card. Cash advances carry higher interest rates than credit card purchases, often around 25%. There may also be cash advance fees, ranging from 3–5%, and there is no grace period, which means interest starts accruing from the date you withdraw the funds.
Deciding whether or not to increase your credit limit depends on your own personal situation. If you’re frequently carrying a balance on your credit card and are only paying the minimum payment, a higher limit could entice you into adding more debt. However, if you want to improve your credit score and plan on reducing your credit card balance, a higher limit can improve your credit utilization ratio and come in handy if ever you run into an emergency.
No, your credit card company needs your permission, either verbally or in writing, before increasing your credit limit. If you agree verbally to an increase, your credit card company will confirm the change in writing before your next credit card statement.
There is no right answer to this question. If you are paying off your balance in full every month and are aware of the risks of adding more credit card debt, you can have as many credit cards as you like. Having at least two credit cards can be useful, however, especially if one card doesn’t work when you really need one. But with more than two or three credit cards, you need to ensure you have responsible repayment habits.
When you receive an offer for a new credit card, it can be tempting to add another card to your wallet, even if you don’t really need it. First, you need to be aware of the risks associated with credit card debt. Second, ask yourself what do you plan on doing with your credit over the next three to six months? If you have major purchases planned, try to put unnecessary credit applications on hold, as they may lower your credit score.
Sometimes, when you realize the dangers and risks associated with credit card debt, you may want to eliminate the temptation altogether and close your credit card account. But your credit cards are often the oldest accounts in your credit report. If you close the account, you risk deleting a substantial part of your credit history. The best course of action would be to find ways to avoid using your credit card, like keeping it in a safe spot that is less accessible than your wallet, or to continue using the card, but only for monthly automated payments.
|Automate payments so you’re never late||Carry a balance with no plan to pay it off|
|Try to pay your balance in full every month||Make only your minimum payment||Pay more than the minimum payment||Use your credit card to make ends meet||Have a plan to pay off debt||Pay one credit card with another|
Are you looking for help reducing your credit card debt? BDO debt professionals and Licensed Insolvency Trustees (LITs) explain a range of debt solutions based on your own personal situation.
Can you better tackle your credit card debt by rejigging your monthly budget? We can help you identify DIY solutions.
Are interest charges an issue? We can help you figure out if debt consolidation is a viable solution or not.
Do you need to find informal debt solutions, like a debt management plan? We will refer you to trusted and acrredited not-for-profit credit counsellors that can help.
Are you unable to repay your debt? An LIT can help you understand if a consumer proposal or bankruptcy is the right debt solution for you.
Credit card debt can be intimidating and stressful. Our debt professionals provide sound advice on a path forward so you don’t have to face your debt alone.
A BDO Licensed Insolvency Trustee is always available to discuss your debt relief options free of charge and without any obligation on your behalf.
For anyone struggling with a heavy debt load, a consumer proposal can provide immediate debt relief and a path to becoming debt-free. And while a consumer proposal will affect your credit, you can rebuild your credit after your consumer proposal is completed.
Debt problems don’t always happen overnight. Yes, financial trouble can occur quickly and unexpectedly. A job loss or a vehicle breakdown could result in a sudden increase in how much debt you’re carrying. But, for many people, debt gradually spirals out of control over time. You might not realize it’s happening until your debt becomes unmanageable. Here are five common signs that you may be experiencing debt problems, and steps you can take to help solve the problems and become debt-free.
Finding out that your soon-to-be spouse has a lot of debt can be shocking, but it can also leave you wondering how that debt will affect your finances. Debt can have a lasting impact on the financial and emotional health of a married couple, so the more you know about your individual and joint debt obligations the better. Here are answers to five common questions about how to deal with debt in your marriage.
Select a new BDO Office then press Change Your LocationChange your location
Call 1-855-BDO-Debt or fill out the form below. A BDO Debt Advisor will contact you within 1 business day. Your story is more than your debt and we’re here to help.
Fields marked with an asterisk (*) are required.