Most Canadians have a couple of credit cards, with about 30% of Canadians not paying their credit card balance in full each month. The average consumer debt in Canada (excluding mortgage) hovers at about $20,000, with Albertans close to $25,000 on the high end and Manitobans at about $17,000 on the low end.
About 15% of Canadians have a credit card spending limit that is under $2,000 and about 41% of Canadians have a credit card spending limit that is over $10,000. The average credit card interest in Canada is about 19%, and can go as high as 29.99% with some cards, which can add up to a lot of credit card debt if it isn’t paid off.
Read on as we explain how you might go about dealing with credit card debt, what to know, and what you can do about getting your finances back on track.
Recent data from StatsCan suggest credit card debt is on the rise (adjusted for seasonality) and the leading type of non-mortgage loan debt in Canada.
How to Pay Off Your Credit Card Debt
You could continue making monthly payments, which will usually take a while, and possibly 10x longer if you only do the minimum monthly payment. Which will result in paying a lot of interest over time, and not exactly your best option.
Another alternative is a balance transfer, where you get another credit card with an introductory APR offer. This is either low interest or no interest, but you have to be good with budgeting and paying it off, otherwise you would probably be even worse off.
Possibly the most common option, and certainly one of the better ones, would be to consider using a debt consolidation method. This is where you use a personal loan or installment loan to pay off existing debt, which also makes things easier to manage as you would be left with just one payment to make.
A debt consolidation loan can be a good idea when borrowers have several high-interest loans, but you might only be eligible if your credit score has improved since taking the original loans. If you credit score has improved, you may find that you qualify for a better interest rate, which is crucial for this to work in your favor.
The way to evaluate if the debt consolidation option is right for you is to start by making a list of all loans and debt and determining the average of the interest rate of all debt you are considering to consolidate.
To calculate your average interest rate for all debts you are thinking of consolidating, you would take the following steps to figure out the percentage.
Take the loan amount and multiply by its interest rate.
$6,000 * 19.99% = $1,199.40
$4,000 * 22.99% = $919.60
$8,000 * 46.96% = $3,756.80
Add these amounts to obtain the total per loan weight factor.
$1,199.40 + $919.60 + $3,756.80 = $5,875.80
Add the loan and debt amounts to get the total loan amount.
$6,000 + $4,000 + $8,000 = $18,000
Divide the total per loan weight factor (step 2) by the total loan amount (step 3).
Then multiply this by 100 so that it’s expressed as a percentage.
$5,875.80 / $18,000 = 0.326433333
0.326433333 * 100 = 32.6433333 (32.64% rounded)
In the example above, the average interest rate across the 3 loans and debt is 32.64%
Finding a personal loan that is below 32.64% would help you to save on interest paid, and many with fair to good credit would probably be able to find a suitable loan option.
When consolidating debt, it is likely that your overall monthly payment amount would decrease since your future payments would be spread out across what is possibly an extended or longer loan term. While you might pay less interest, and have lower monthly payments, it could also mean that you pay more over the life of the loan. It’s for this reason that we recommend you save what you can from those lower monthly payments. At a later date you might be able to use that towards paying down your personal loan or installment loan for debt consolidation ahead of schedule. It’s also advised to review the terms of the agreement prior to signing, and be on the lookout for prepayment penalties among other things. While this should not discourage you immediately, you should run the numbers to see if it’s a deterrent to signing should you want to pay off your loan early.
What Happens When You Don’t Pay Your Credit Card
If you fall behind on your credit card payments and are late to pay, you can be hit with various penalties or late fees, which vary by creditor and the terms of your credit card agreement.
Some creditors might report you to the credit bureaus in Canada, and if the bill continues to remain unpaid, they might increase the interest rate. An increase in your rate might be temporary or permanent, and it’s likely you would have been warned about this. Which is one more reason it’s important to read the terms for credit cards, lines of credit and personal loans, so that you are aware of not just the payment schedule but also fees and obligations.
If you are still unable to make your credit card payments after a series of reminders, the credit card company might send your file to collections, which would be another hit to your credit report called a derogatory mark.
How Late Credit Card Payments Can Impact A Credit Score
Your payment history is 35% of your credit score, and late payments can impact your score to the point where you might no longer be eligible for low interest loans, credit cards or mortgages.
This could suggest to lenders that you might be a credit risk, making it challenging to find options other than higher interest loans in the future, until you are able to improve your credit score to an acceptable number that banks and lenders might consider.
When you are overdue with your credit card payment and it’s reported to the bureaus, your credit score can drop by 90 to 100 points. If you are less than 30 days late it is probably not reported to the bureaus. If you are over 120 days past due, it is possible that a lender would mark your account as a charge-off. This is a derogatory entry that would be on your credit report and it can last 6 years with Transunion, and 7 years with Equifax. Having derogatory marks on your credit report can follow you for a long time and it’s best to avoid if at all possible.
Building (or rebuilding) your credit score takes time, so it’s important to protect your score as it has a direct effect on your ability to get loans and credit. Paying off any debt you may have makes it easier to manage your finances and stay on track.
What to Know About Credit Card Minimum Payments
If you are barely making a dent in your credit card debt, such as only being able to afford minimum payments, it’s in your best interest to consider your options. When you only make minimum payments on your credit card debt, it often only goes towards the interest and takes a very long time before you start paying the principal amount owed. While it all depends on the total amount owed, if your debt is in the thousands, when you only make the minimum payments for credit card debt, it will likely take years to pay it all off.
Credit Card Myths
There are a number of credit card myths that you should be aware of:
- The more credit cards you have, the better your credit score will be
- Having multiple credit cards is bad for your credit
- You need to carry a balance to build credit
- Paying the minimum keeps your score up
- Closing a credit card improves your credit score
Additionally, using debit cards does not help build a good credit score, and selecting ‘credit’ while using a debit card for a purchase does not help to raise your credit score either.
Quick Credit Card Tips
- Keep the amount of credit limit used under 30% (More about debt to income ratio)
- Pay your credit card balance off in full each month if you can
- Avoid making minimum payments, and pay as much as you can monthly
- If you can’t pay off the credit card amount due, pay double the minimum at the very least
- When your credit card debt accumulates, try to stop using your card and pay it off
- Using balance alerts can help to keep your spending in check
- If you find your credit card due date falls at an inconvenient time, have it moved
- If you know you’ll spend a certain amount, you can prepay it to avoid late payments
- Setup your bank account to automatically pay the monthly minimum to avoid being late
- If you have multiple cards, Pay off your most expensive balance first
- For larger purchases, a personal loan might make more sense than using a credit card
- Review your credit card statement each month, not just pay it.
You should also watch yourself with Buy Now Pay Later options as these can also create issues that can put you in debt or disrupt your budget.
Using a credit card responsibly can help you to avoid credit card debt in the future. Tracking your use, monitoring your statements, and staying within your budget when it comes to spending and managing your finances.
- How to Eliminate Credit Card Debt with Personal Loans
- How a Personal Loan Can Help Pay Off Your Debt Faster