6 | Credit

Loan

An agreement to use money that belongs to someone else and pay it back at a later date.

Interest Rate

The amount, usually expressed as a percentage, that determines how much additional money you pay (loan) or receive (investment) when borrowing or lending money.

Interest

Extra money paid to someone else when you borrow money or money that may be paid to you when you have invested money.

Insurance

Financial protection against possible loss or damage. You could have insurance on your house, car or life. In the event of accidental damage to the insured property or person, you would receive money to help deal with the situation.

Income

The amount of money a person has coming in to their household.

Expenses

Items that money is spent on, such as rent, food, bus fare and clothing.

Deposit

Putting money into an account. Cash, cheques and electronic transfers that are added to your account are called deposits.

Currency

Money that a country uses. In Canada, our currency is the Canadian dollar.

Credit Card

A card that represents a credit agreement. A bank or financial institution may give a credit card that can be used to pay for goods or services before the money is actually deposited in the account. The credit card owner agrees to pay back the borrowed money at a designated time. If full payment is not made on the payment date, interest will usually be charged.

Credit

Money that a bank, business, or person allows someone else to use and then pay back in the future.

Budget

A document used to organize and track income and expenses.

Bank Account

An account you have at the bank where you can deposit and/or withdraw money.

Balance

The amount of money remaining in an account. In banking, your balance is what you have left after all deposit and withdrawal transactions have been processed. If you receive a bank statement your “balance” will be the money that is left in your account.

 Objective

This section gives you a good understanding of how credit cards work. You will learn about the benefits and pitfalls of having a credit card. You will also learn about the different kinds of credit cards and what to do if you get into too much credit card debt. After reading this section, you should understand the following concepts:

  • What’s good and bad about credit cards.
  • How to get out of credit card debt.
  • How pre-paid credit cards work.

The Good, the Bad and the Ugly Side of Credit Cards

Make sure you’re financially fit before weighing yourself down with a credit card.

Make sure you’re financially fit before weighing yourself down with a credit card.

Having a credit card is like walking around with a loan from your financial institution right in your wallet. This small piece of plastic means that you have an agreement with your financial institution. This agreement allows you to borrow money to pay for goods and services with your credit card and requires you to pay back the money by a certain date.

All credit cards have limits that say how much money your financial institution is willing to lend you. While you may be thinking, “Wow, this sounds great! I need a credit card,” you need to know that there is more to having a credit card than the convenience it offers.

The good points about credit cards are:

  • Convenience – credit cards are easy to use and can be safer than carrying large amounts of cash with you.
  • Establish Credit Rating – Credit cards are often the first credit people obtain. If you make your payments on time, stay within your limit, and pay off your balance every month, you will establish a good credit rating. Having a good credit rating helps you qualify for personal loans, mortgages, or lines of credit.
  • Ease of use – credit cards provide an easy way to buy things online, over the phone, and in person.
  • Easy currency conversion when traveling – credit cards are particularly handy when you are traveling to countries that use a different currency. Let’s say you were driving in Seattle and your car was low on gas, but you didn’t have any American money on you. You could just use your credit card and whatever you paid for gas would be converted to Canadian dollars on your next statement.
  • Reward programs – Some credit cards offer reward programs that can help save you money. Rewards can be used for many items and services including, air travel, insurance, or cash back.

The bad points about credit cards are:

  • Ease of over spending – Because credit cards are so easy to use, some credit card users don’t keep track of their spending. At the end of the month they find they don’t have enough money to pay for what they charged.
  • High interest rates – Many people get stuck in the “making only the minimum payment” cycle. If you only make the minimum payment, you end up paying a lot more for items than what the price tag read in the store. For example, let’s say you just received your first credit card and it has a 9% introductory interest rate. You buy an MP3 Player for $284.00 and pay it off at the end of the month; the MP3 Player cost you $284.00. But if you only make the minimum payment of $7.07 each month until the amount is paid off, that same MP3 Player will cost you $339.39! 
    When you carry more debt than you have the ability to pay, you are headed for financial trouble.
  • Ability to ruin your credit rating – If you don’t use your credit card properly, it can ruin your credit! If you don’t make your payments on time, skip payments, or go over your limit and carry a balance every month, you will get a bad credit rating. When you have a bad credit rating, you won’t qualify for personal loans, mortgages, or lines of credit. Not only will it be difficult to get a loan when you need it, you will end up paying a higher interest rate and possibly incur more fees, which means you will end up paying a lot more money for your purchases.
  • Fine print –There are LOTS of details in the fine print! Often a credit card sounds like a good deal until your read the details. Some of these details include annual fees, a higher interest rate if you miss a payment, extra fees if you go over your limit, application fees, cash advance fees and more. It’s important to read all the details in your credit card agreement so you understand how much you are being charged and for what services.
  • Temptation – Some people get sucked into collecting credit cards like hockey cards! Everywhere you go nowadays someone is eager to offer you “great deal.” Airports, concerts, and shopping malls are all places where financial institutions set up booths to offer consumers credit cards. Most of the time you are lured by a “special gift” like a t-shirt, set of knives, or 25% off your first purchase. If you are collecting credit cards chances are you are collecting balances and fees too.

Did you know the average debt–to-income ratio in Canada is 150%? That means that for every $1,000 we take home in pay, we spend $1,500!

The Ugly – How to Get Out of Credit Card Debt

If you have credit card debt, you are not alone. The buy now/pay later approach is convenient, popular, and costly.

A 2011 study noted that Canadians who carry a balance on credit cards have an average outstanding balance of $6,938.00. When you add the interest, which ranges from 9 – 25%, you can see how you end up paying a lot more when you use credit cards!

$6,938.00 with a 9% interest rate = $642.42 in interest. Your $6,938 debt has now grown to $7,580.41.

$6,938.00 with a 17% interest rate = $1,179.46 in interest. Your $6,938 debt has now grown to $8,117.46.

$6,938.00 with a 25% interest rate = $1,734.50 in interest. Your $6,938 debt has now grown to $8,672.50.

When you carry more debt than you have the ability to pay, you are headed for financial trouble.

Once you are in financial trouble, you need to accept responsibility and take action to repair your financial situation. In taking responsibility, you need to accept that the credit card company or the financial institution that issued you the credit card is not to blame. It’s important to recognize that your actions and choices got you into your financial mess, and they can get you out of it too. But remember, even if you repair your credit and pay off your credit card debt, you will find yourself in the same situation again unless you change what got you into the debt in the first place…your spending habits.

So how do you get out of credit card debt? Fortunately, there are free credit counselling agencies that can help you. They will help you resolve your situation with as little stress as possible.

Credit Counsellors can help you:

  • Repay your debts by simplifying your debt into one monthly payment
  • Explore your options to get out of debt and get back on track
  • Create a budget so you can effectively manage your bills and expenses
  • Save lots of money in interest

To find a credit counselling agency, you can look in your local phone book or do a search on the Internet.

If you’d rather resolve your debt issues on your own, here’s how to get started:

  1.  List all your debt including all credit cards, lines of credit, pay day loans, student loans, car financing,…you get the idea.
  2. Now list the interest rates beside each debt. Sort the list to show debt with the highest interest rate at the top of your list and the lowest interest rate at the bottom.
  3. List what your minimum payment is beside each debt. This is what you have to pay each month so you don’t ruin your credit (To reduce you debt, you will have to pay more than the minimum payment.)
Once you pay the most expensive debt, move on to the next one.

Now that you know how much you owe and to whom, it’s time to get busy paying down your debt. Start by paying off the debt with the highest interest rate first while maintaining the minimum payments on all your other debt. If you can pay more than the minimum payment, that is even better.

Once you pay the most expensive debt, move on to the next one. You may also want to cancel your credit cards so you are not tempted to use them while you’re paying everything off.

Another option to deal with your debt is to consolidate. A consolidation loan will pay off your debts and give you one monthly payment. Generally, these types of loans have a lower interest rate than credit cards, so you can save money. To find out if a consolidation loan is right for you, talk to your financial institution.

How Pre-paid & Secured Credit Cards Work

Pre-paid and secured credit cards offer some of the advantages of regular credit cards without all of the risks of over spending. With both pre-paid and secured credit cards, you pay money upfront to use them, but they do have some differences.

Pre-Paid Cards

You can purchase pre-paid credit cards from gas stations, convenience stores and even Canada Post. The amounts range from $50 to $250 dollars. Pre-paid credit cards are often given as gifts or used by people who do not have a regular credit card.

The good things about pre-paid credit cards are:

  • Privacy – you are pretty much anonymous.
  • Convenience – they are generally accepted wherever Visa and MasterCard are accepted.
  • Lower interest rates – They don’t carry the high interest rates that traditional credit cards do.
  • Easy to get – No credit check or bank account required.
  • Available for use immediately – no waiting required.
  • Prepaid and controlled by you.

The bad things about Pre-paid credit cards are:

  • They don’t help build or re-build your credit.
  • They are often not accepted at hotels / motels.
  • They often have surprise hidden fees (like an inactivity fee).
  • They can expire after 12 months—even if you have a balance!

Secured Credit Cards

The main difference between pre-paid and secured credit cards is that secured credit cards help you build or re-build your credit.

Each financial institution offers different variations of secured credit cards so it’s important to talk to someone at your branch to learn more. Most secured credit cards require you to leave a deposit to be eligible.

The deposit is often double what your credit limit will be. For example, if you want a $500.00 secured credit card, you need to leave a deposit of $1,000.00. If you honour your agreement, you get your deposit back. Sometimes, financial institutions give the deposit back after 6 months and sometimes after 12 months.

It’s important to read the secured credit card agreement so you know and understand the terms of your specific card.

Take the next step:  7 | Banking

 Learning Resources

This clip offers advice on getting rid of credit card debt from money expert, Gail Vax Oxlade (the host of Til Debt Do Us Part and Princess).

Need a plan to get out of debt? Then this is the tool for you! This easy to use ―”Own up to Your Debt” worksheet helps you add up all your debt and tells you what your payments will be if you want to pay your debt off in 1, 2, or 3 years.

This cartoon video clip uses humour to explain how credit cards and interest rates work. It is an easy to understand clip appropriate for all age groups.

This link provides a great overview for understanding credit card fees.

This link provides tips on how to deal with debt collectors.

 Tips Just for You…

Families

Did you know that your credit card company might charge you an Inactive account fee if you have not used your credit card for a period of time? Just because you cut up your credit card or it expired doesn’t mean your financial institution has closed your account.

If you no longer need your credit card, make sure you contact your card issuer to cancel your card. Make a note of the date and time you called and to whom you spoke to, so you have a record that you cancelled the account. Your financial institution should also send you a record of the cancellation and you should keep a copy of that too.

Take the next step:  7 | Banking

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