Credit Cards & Other Debt

Credit cards are a very convenient way to make purchases without having to carry cash. Lately, every bank, department store and other financial institutions offer credit cards. For a small monthly payment, that big screen TV can be in your living room today. Unfortunately, you may not be thinking that the new TV you’re enjoying now will cost you twice what you would have paid in cash, once interest is added.

The average credit card in Canada carries an interest rate of 19% for bank-issued cards and 24 to 36% for department or specialty store cards. Why would a bank be so willing to give credit cards to everyone? Wouldn't you jump at an opportunity to make 19% interest on your money every year?

Other Debt

The reason most people have trouble with credit cards is that, as payments are made, credit is freed up and used again, which can lead to a never-ending cycle of debt. This cycle is called revolving credit.

Other forms of debt don’t operate in this way. Mortgages, car loans and personal loans give an initial amount of credit in the beginning, which must then be paid back. Paying down $1,000 doesn’t open the door to spend another $1,000. Additionally, these loans usually have lower interest rates than credit cards. However, that doesn't mean other debt is any less of a concern. Elimination of debt and interest payments is one of the cornerstones of cash management and financial planning.

Overdraft Protection

Overdraft protection is available for most bank accounts. If your account runs short of money, the bank will cover for you. But before you run out and thank the bank for its kindness, remember, overdraft protection is like a loan. The bank charges interest on the amount borrowed plus a fee for every overdraft item. Overdrafts are one of the most expensive ways of borrowing.

Tips for Using Credit Cards Wisely

Use credit cards for:

  • Short-term borrowing: buy now and pay later
  • Convenience
  • Reward points: be aware these cards can come with annual fees

Avoid using credit cards for:

  • Emergencies, if you can’t pay it off every month
  • Impulse purchases

Aim to:

  • Pay off your credit card balances completely each month.
  • Use a lower-rate card if you must carry a balance.
  • Avoid using overdraft protection. It has high-interest rates and high transaction fees.