Household debt is rising rapidly in Canada. While much of the blame can be attributed to the attractiveness of super low interest rates, mortgage debt and rising house prices, individually you may have more debt because of the way you borrow and make payments.
People frequently do not know the full terms and conditions of their credit cards, bank loan or line of credit. Do you know what types of fees you have to pay if you are late? Do you know when interest starts if you take a cash advance? Not knowing the answer to these questions can mean you pay more fees than you should.
Based on your payment pattern, what type of borrower are you?
Pay in Full Borrower
A 2015 survey by Abacus Data found that roughly 56% of Canadian pay their credit card balances in full every month. Paying your balances in full, each and every month means you pay no interest or payment fees on your account. Pay in full borrowers use their credit card as a payment convenience so they don’t have to carry cash but are not using credit cards as a source of borrowing.
Borrower / Saver
The same Abacus Data study found that for credit card users who typically do carry a balance beyond month end, 16% pay it off most months and 40% pay off more than the minimum payment required. Borrower/savers tend to carry credit card balances most months pushing to pay down those balances, only to see them increase again.
The disadvantage of this approach is that you will incur interest costs and fees which lower your ability to save money. While sometimes the cause is an unexpected expense, like a car repair, it can also be a sign that you have a tendency towards impulse shopping.
Our advice is to keep track of your balances regularly and make it a goal not to charge more than you can safely repay at the end of the month. Having an emergency fund can help reduce the need to turn to credit periodically.
If you make only the minimum payments on your credit card bills, regularly incur late charges and over-the-limit fees or take cash advances, your borrowing and debt payment habits make you a fee payer.
The fee payer is using credit card debt as a substitute for a cash shortfall. Balances typically grow over time because you are not able to catch up.
It’s time to create a budget to help you balance your cash inflows and outflows. Include a debt repayment plan as part of this budget to reduce your overall balances.
Alternative financial service user (payday loan user)
According to a study conducted by Harris Poll on behalf of Hoyes Michalos, one-in-ten Ontarians have taken out a payday loan in the past 12 months. Almost half of all payday loan users agree they turn to payday loans because they already carry debt.
The high fees and costs of alternative lending products making getting off this debt cycle very difficult.
Seldom do our clients start out as a payday loan user. The typical scenario is that of a credit card user who, for one reason or another began to use credit cards as a borrowing tool, rather than a payment tool. Having done so they became a borrower / saver. As debt increases, paying down balances becomes increasingly difficult – and soon these same individuals find themselves becoming a fee payer, with many turning to payday loans to continue to make ends meet.
Ask yourself where you sit on this scale? Take action today to reverse the cycle so you too can become a wise, pay in full borrower.