13 Myths About Credit Card Debt in Canada: Fact vs Fiction

13 Myths About Credit Card Debt in Canada: Fact vs Fiction

Credit card debt affects millions of Canadians, with Equifax reporting the average Canadian carries more than $4,300 in credit card debt. Yet many misconceptions persist about how credit cards work and the best ways to manage credit card debt. These myths can lead to poor financial decisions and make it harder to deal with overwhelming debt. Let’s examine common credit card debt myths and uncover the facts you need to know.

Myth #1: Credit Card Debt is Always Bad

While excessive credit card debt can be harmful, responsible use of credit cards can provide benefits when managed properly. In Canada, where credit cards typically carry interest rates between 19.99% and 29.99%, how you use them determines whether they’re helpful or harmful.

Credit cards can be a valuable part of a healthy financial strategy if used wisely:

  • Credit cards can help you meet obligations between paycheques without resorting to costly payday loans
  • Credit card rewards can provide significant value, such as cashback, travel points, or discounts.
  • Many credit cards offer perks like extended warranties and fraud protection, which can save you money in the long run.
  • Regular, responsible credit card use helps establish a positive credit profile, which is essential for future borrowing, such as securing a mortgage.

However, credit card debt becomes problematic when:

  • Carrying high-interest balances long-term
  • Using cards for unnecessary discretionary spending
  • Relying on credit cards for basic living expenses
  • Making purchases without a clear repayment plan

The key is understanding how to use credit cards as a financial tool rather than viewing them as either entirely good or bad. Focus on maintaining manageable balances and having a solid plan for any credit card spending.

Myth #2: Carrying a Balance Improves Your Credit Score

Carrying a balance doesn’t improve your credit score – paying on time does. In Canada, credit scores range from 300-900 and your payment history affects about 35% of your overall score. Credit utilization – how much of your credit limit you use – is the second most important factor.

To build good credit, focus on these key credit card practices:

  • Make all payments on time
  • Keep utilization below 30% of your credit limit
  • Maintain a long history of responsible credit use
  • Hold a mix of different credit types

Carrying a balance only accrues interest without positively impacting your score. Paying your balance in full each month is the better strategy.

Myth #3: Making Minimum Payments is Enough

Making only minimum payments on your credit card is one of the costliest debt management mistakes. Minimum payments are typically 3% of the balance or $10, whichever is higher. While minimum payments keep your account in good standing, making only your minimums keeps you in debt longer.

Consider this example: On a $5,000 credit card balance at 19.99% interest, making only minimum payments of 3% would take over 18 years to pay off and cost over $7,000 in interest charges alone.

To effectively manage credit card debt:

  • Pay more than the minimum whenever possible
  • Target the highest interest cards first (the avalanche method)
  • Consider debt consolidation options
  • Avoid adding new charges while paying down balances

Use this Government of Canada credit card payment calculator to understand the impact of minimum payments versus making extra payments on your credit card debt.

Myth #4: Having Multiple Credit Cards Always Hurts Your Credit Score

The number of credit cards you have doesn’t directly impact your credit score. What matters is how you use them. Multiple cards can actually help your credit utilization ratio by increasing your total available credit, and keeping older accounts open (like your first student credit card) builds a longer credit history.

Having multiple cards increases the risk of:

  • Missing payments by juggling multiple due dates
  • Accumulating more debt across several cards
  • Higher total minimum payments
  • More complicated debt resolution if you need to file a consumer proposal or bankruptcy

Myth #5: Credit Repair Agencies Can Fix Your Credit

Credit repair agencies often claim they can quickly improve your credit score or remove negative information from your credit report for a fee. This is misleading. These companies cannot remove accurate information from your credit report or do anything to improve your score that you cannot do yourself. Negative information like missed payments or accounts in collection remain on your credit report for 6-7 years, depending on the credit bureau.

Your credit score can only improve through:

  • Making all payments on time going forward
  • Reducing your credit utilization ratio
  • Allowing negative information to expire naturally
  • Building new positive credit history

If you’re concerned about your credit score, start by requesting your free credit report from TransUnion or Equifax to check for errors. You can dispute any inaccurate information directly with the credit bureaus at no cost.

Myth #6: Closing Credit Cards Improves Your Credit Score

Closing a card can harm your score because:

  • Your credit utilization ratio increases when you reduce your total available credit
  • Your length of credit history may shorten, especially if it’s an older account
  • Your credit mix becomes less diverse, which can affect your overall creditworthiness

Keep your oldest cards open, especially those with no annual fees, to preserve your credit profile. However, if managing multiple cards leads to overspending or missed payments, it’s better to close some accounts and focus on maintaining a smaller number of cards responsibly.

Myth #7: You Can Go to Jail for Unpaid Credit Card Debt

You cannot be imprisoned for failing to pay credit card debt in Canada. Credit card debt is a civil matter, not a criminal one. While creditors can report your debt to the credit bureaus and sue you in court to recover the money owed.

Myth #8: Collection Agencies Can Take Your Assets Without Court Approval

Collection agencies must obtain a court judgment before taking any legal action against your assets or income. They cannot seize your bank account or garnish your wages without court approval. They must also pursue this legal action within a certain period of time, known as the statue of limitation period. In Ontario, that period is two years from the date of last payment.

Even with a court judgment, certain assets and income are exempt from seizure under provincial laws.

Myth #9: Credit Card Companies Will Forgive Your Debt if You Ask

Credit card companies rarely forgive principal debt amounts voluntarily. While they may offer:

These options usually require lump-sum payments or don’t significantly reduce what you owe. 

If you have significant credit card debt a better option may be to consider the benefits of filing a consumer proposal. A consumer proposal is a legal process that can reduce credit card debt by up to 80% while protecting you from collection actions and interest charges.

Myth #10: You Should Max Out Cards Before Filing Bankruptcy

Using credit cards knowing you plan to file bankruptcy is considered fraud under Canadian law. Running up credit card balances before filing can:

  • Result in these debts being excluded from discharge
  • Lead to a court-ordered conditional discharge
  • Extend your bankruptcy period
  • Result in criminal charges in severe cases

Bankruptcy does discharge credit card debt in Canada. Be sure to talk with your Licensed Insolvency Trustee about the impact of recent credit card use on your discharge.

Myth #11: Only People with Low Incomes Struggle with Credit Card Debt

It’s a myth that credit card debt is only a low-income problem. Homeowners and middle-income earners typically carry higher credit card balances and have more cards than other groups. Our bankruptcy study shows that insolvent homeowners carry almost twice as much credit card debt as non-homeowners.

The universal risk factor for credit card debt is spending more than you earn, regardless of income level. Good financial habits, including budgeting and careful credit use, are essential across all income brackets.

Myth #12: I’ll Never Get a Credit Card Again if I File Bankruptcy

While bankruptcy does impact your credit score significantly, it doesn’t permanently prevent you from obtaining credit cards. Many Canadians successfully rebuild their credit after bankruptcy through responsible use of new credit products. Most people can qualify for a secured credit card immediately after discharge, and regular credit cards within a few years of bankruptcy.

Steps to rebuild credit after bankruptcy:

  • Start with a secured credit card that requires a security deposit
  • Consider becoming an authorized user on someone else’s card
  • Work with your bank where you have an existing relationship
  • Focus on building positive payment history with small purchases

Myth #13: Ignoring Credit Card Debt Makes It Go Away

Credit card debt doesn’t disappear if you ignore it. While there is a two-year limitation period on debt collection in Ontario, creditors can still:

  • Continue collection attempts
  • Report the debt to credit bureaus
  • Obtain a court judgment before the limitation period expires
  • Pursue collection for up to 20 years with a judgment

Don’t let credit card debt myths prevent you from getting the help you need. If you’re struggling with credit card payments or overwhelmed by debt, contact a Licensed Insolvency Trustee at Hoyes Michalos today for a free consultation to review your options and create a plan to become debt-free.

Similar Posts:

  1. Should You Pay Credit Card Debt with Another Credit Card?
  2. How Long Does Negative Information Affect Your Credit Report?
  3. How Long Does It Take To Get My Credit Back After Bankruptcy or Proposal?
  4. How To Pay Credit Cards – Pay More Than The Minimum
  5. Minimum Payments on Credit Cards are Keeping You in Debt

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