Cut my credit cards
During financial literacy month, Canada's top money bloggers are sharing their best piece of advice.
Canadians are getting smarter about money. That said, I've seen one type of behaviour destroy more personal wealth than any other: Misuse of credit cards.
I use my credit card regularly. It's a convenient way to pay for everyday items such as groceries, gas, and the odd meal out. Putting my purchases on my credit card allows me to easily track my spending, and best of all, I get free stuff just for using it to buy things I'd be buying anyway. I'm sure at some point you've been dazzled with credit card offers that promise points, miles, or cash back. I figure, why not take this free lunch if they're going to put it on a platter for you.
The key to my buy now, pay later approach is this: My credit card doesn't use me, I use it. One of the reasons the banks that issue credit cards can afford to give people like me thousands of dollars' worth of free stuff every year is because so many people allow their credit card to use them; consequently, they pay high interest rates on their balance every month.
A survey for a bankruptcy trustees company done earlier this year reported that a quarter of Canadians didn't expect to pay off their credit card balances during 2013 and one in 20 wondered if they would ever be able to pay it off. TransUnion recently found that the average Canadian credit card debt has reached $3,650.
RBC Economics reported that as a group, Canadians now owe over $72-billion in credit card debt. This is worrisome for many Canadians' long-term financial prospects. When large chunks of your paycheque are going towards paying interest on credit cards, it takes away from other parts of your budget and delays long-term goals such as saving for a down payment on a house or building a retirement nest egg.
If you only do one thing right in the whole realm of personal finance, make it that you never carry a balance on your credit card. Don't do it for any amount of time or any amount of money, if you can help it. The interest rates that most credit cards charge are extremely high compared to other forms of credit. This means that the vast majority of the time it will cost you a lot more money to borrow from your credit card company than it will from other sources.
For example, the credit card I use has an interest rate of 19.99 per cent. This is roughly seven-and-a-half times higher than my mortgage rate, five times greater than my fiancé's student loans interest rates, and nearly three times what my unsecured line of credit charges. Even low-interest credit cards will usually charge 9 to 12 per cent interest.
When people decide to "put it on the plastic" they often don't think about the long-term costs they are racking up. Credit cards essentially allow us to tap into our future income for a steep fee – the interest rate. In order to buy something on a credit card today, you're sacrificing a much bigger chunk of your future income than the price tag reveals.
With the Christmas season fast approaching, there are people who are going to put $1,000 or so on their credit card, money they won't be able to immediately pay off. If they make only the minimum payments going forward (that's about $26.70 in the case of a 19.99 per cent credit card) the balance will take about five years to repay and the amount of interest they will pay over those 60 months is roughly $580. That means that the unpaid portion of their 2013 Christmas credit card bill is actually going to cost them nearly $1,600 – for $1,000 worth of stuff.
Credit cards are a psychological trap for our consumer-driven society. They offer us all the pleasure of buying up front and all of the pain of paying later on. Delayed gratification be damned, our prehistorically-wired brains want what they want and they want it now.
Unfortunately, credit card companies have figured out how to tap into that part of us and use it against our best interests. Use modern logic to fight age-old impulses and promise yourself that you'll never buy anything on a credit card that you can't pay off at the end of the month.
Kyle Prevost is a humanities teacher from Manitoba, and the blogger behind youngandthrifty.ca as well as myuniversitymoney.com. He is also the co-author of More Money for Beer and Textbooks – A Financial Guide for Today's Canadian Student.