INDEPTH: PERSONAL FINANCE
Credit cards – convenience at a price
by Tom McFeat, CBC News Online | September
20, 2004
We Canadians sure love our plastic. We have more than 50 million
Visa and MasterCards. And we've charged almost $50 billion to
them. We have 24 million more retail credit cards from issuers
as diverse as Petro-Canada to the Hudson's Bay Company to Canadian
Tire.
There are many reasons why we charge so much on so many cards.
It's convenient for one. They're instantly accepted at 650,000
outlets in Canada and millions more around the world. No need
to carry around large amounts of cash. Some credit cards also
come with insurance benefits or reward points good for free
travel or other discounts. And if we pay off the full amount
within the grace period (except for cash advances), we aren't
even charged any interest.
Quick Fact:
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Average amount charged on a Visa or MasterCard:
$102
Source: Canadian Bankers Association
|
So what's the problem? Well, for many Canadians, there isn't
one. Figures show that more than 60 per cent of us do pay off
the full balance each month. And the Canadian Bankers Association
reports that delinquency ratios on Visa and MasterCards (the
percentage of accounts overdue by more than 90 days) stands
at just 0.8 per cent.
But ask any credit counsellor why Canadians run into financial
trouble and they'll invariably mention the inability to control
credit card debt very early in their answers.
The credit industry certainly does a thorough job of marketing
its product. The market research firm Mail Monitor reported
that Canadians received 208.3 million credit card solicitation
offers in the mail in 2001, mainly for so-called platinum cards.
Most were from American card companies like MBNA and Capital
One. Many also included a low introductory rate for the first
six months, after which the usual rates applied.
Why paying the minimum can mean paying the maximum
And that's where part of the problem lies. The big banks' prime
lending rate may be low, but the usual rates that most standard
credit cards charge are much higher. Many cards charge 17.5
to 19.9 per cent on overdue balances. Department store or gasoline
company cards are even worse. Count on paying 24 to 28.8 per
cent a year on outstanding balances there. And they make it
so easy to pay just a little. Many allow minimum monthly payments
of as little as $10 or two per cent of the amount owed.
Quick Fact:
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Maximum annual interest rate allowed under the Criminal
Code:
60 per cent
|
Paying that little, however, can stretch the debt out to an
astonishing degree. The Credit Counselling Service of Toronto
has a Debt Calculator in its website that illustrates this only
too well (the link is at the bottom of this page).
Let's assume you owe $10,000 on a credit card that carries an
18-per-cent interest rate. Let's also assume you want to take
them up on their minimum monthly payment terms of three per
cent of the outstanding balance (or $10, whichever is greater).
Enter the variables and you'll see that simply paying the minimum
will mean that it will take you 272 months to pay off the debt
(that's almost 23 YEARS). You'll also pay almost $9,800 in interest,
almost as much as you charged. And this assumes you charge nothing
more on that card during that 23-year period.
So how do I get around those high rates?
The easiest way is, of course, to pay off your balance in full
each month. If you can't do that, you can try transferring that
debt to something that costs less to service. A personal line
of credit for most Canadians can be arranged at their local
financial institution, often at single-digit rates. Secured
lines of credit, like home equity loans, are the cheapest.
Another way of paying less interest is to use a credit card
that charges less interest. And no, they don't all charge the
same…not even close. Most of the credit card solicitations are
for high-rate gold and platinum cards. These often come with
added bells and whistles like the ability to earn travel points
or cash discounts on cars. But if you carry a balance and want
a cheaper card, the same bank that issued you your Visa or MasterCard
probably also offers a cheaper low-rate card. You just have
to ask for one.
The Financial Consumer Agency of Canada publishes a comprehensive
list of credit card interest rates on its website (the link
is at the bottom of this page). It compares the features of
more than 200 cards issued by 26 Canadian issuers.
Industry Canada also has a Credit Card Costs Calculator that
will let you see just how much you're actually paying when you
use your card (the link is at the bottom of this page). The
low interest rate cards typically have a small annual fee. But
if you regularly carry a balance, these are the ones to have.
Conversely, if you always pay off your credit card balance in
full each month, a standard higher-rate card with no annual
fee is the one to have.
Quick Fact:
|
Number of payday loan stores in Canada:
1,200
Source: Canadian Association of Community Financial
Service Providers |
Once you have any credit card, you can also expect to be offered
incentives to charge more though "convenience cheques." One
company suggested the cheques could be used to pay the babysitter.
Remember, these are cash advances and interest starts accruing
from the day they're posted until they're paid in full.
And then there are the "No interest, no payments for a year"
promotions. In most cases, these are actually credit card promotions.
You can only defer those payments if you have a credit card
from the issuer, usually a retail store. Once that no-payment
period elapses a year from now, you will have to pay the entire
amount owing. Of course, if you haven't been saving regularly
to make that payment, you may not have the money. In that case,
the entire amount will simply be charged to your credit card,
usually at 28.8 per cent interest. And that's what the card
issuer is counting on.
Payday loans
For those who can't get a credit card, or those who have a poor
credit history that limits access to other forms of credit,
payday loans are the lenders of last resort (loansharks excepted).
They are also the most expensive.
The concept is simple enough. You don't have enough money to
make it to your next paycheque. So you go to a payday lender
who will lend you, say, $100 for two weeks until your next paycheque.
Of course, they levy fees, service charges and interest on that
loan that will add $20 to the cost of that $100 loan. You get
your $100 instantly and write out a cheque for $120 dated on
the day of your next paycheque. That works out to an annual
interest rate of over 500 per cent.
But that's not the worst of it. On March 29, 2004, CBC Radio
One's The Current talked to one lawyer who represented
a woman who borrowed $520. She kept rolling over her loan every
two weeks for more than two years because she was never able
to repay the original loan. Each rollover cost her $130 in fees
and interest. By the time she was able to come up with the full
amount owing (some 30 months later), she had paid more than
$8,000 in fees and interest. (A link to The Current's
full report on payday loans is on the bottom of this page).
The payday loan companies defend their business, saying they
provide a much-needed service. They point out (correctly) that
banks aren't interested in loaning a few hundred dollars for
a week or two.
Several class-action suits have been filed against providers
of payday loans. And governments are looking into regulating
the industry.
In the meantime, Ottawa bankruptcy lawyer Stanley Kershman,
the author of Put Your Debt on a Diet, has some advice
for anyone thinking of taking out a payday loan. "Don't," he
writes. "If money is short between paydays…find another way
of surviving your budget shortfall."
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