Dealing with debt

Credit card debt

What you need to know about credit card debt

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.

Woman using credit card

How do credit cards work?

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 to 20%. The higher the balance you carry on your credit card every month, the more you will pay in interest charges.

Interest charges and minimum payments on your credit cards

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 5% 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 $10Minimum payment of $40Minimum payment of $50
Annual interest rate18%18%
Monthly payment$10$40$50
Total time to pay off10 years4.5 years2 years
Total paid$1,789$1,381.79$1,197.83

Credit limits and credit utilization

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.

What are some other risks of a maxed-out credit card?

Your credit score will drop

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.

Your minimum payment will increase

As your balance increases, so does your minimum payment, which can add further pressure to your budget.

Your transactions could be declined

Without any room to make purchases, you might not be able to use your credit card.

Do you need help with your debt?

Credit card do’s and don’ts

Credit card do'sCredit card don'ts
Automate payments so you're never lateCarry a balance with no plan to pay it off
Try to pay your balance in full every monthMake only the minimum payment
Pay more than the minimum paymentUse your credit card to make ends meet
Have a plan to pay off debtPay one credit card with another

4 ways to solve credit card debt

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.

1. Budgeting and repayment strategies

Can you better tackle your credit card debt by rejigging your monthly budget? We can help you identify DIY solutions.

2. Debt consolidation loan

Are interest charges an issue? We can help you figure out if debt consolidation is a viable solution or not.

3. Credit counselling

Do you need to find informal debt solutions, like a debt management plan? We will refer you to trusted and accredited not-for-profit credit counsellors that can help.

4. Debt forgiveness

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.

How BDO can help

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.