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19 November 2010

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Credit Card Debt

 

Carrying a balance on a credit card is

just about the most expensive way of

borrowing money and can double the cost of a purchase

 

The Certified General Accountants Association of Canada (CGAAC)says that Canadian household debt rose to an all-time high of $1.4 trillion in 2009; that works out to close to $41,740 for each man, woman, and child in the country.

 

“Lines of credit and credit cards,” says the Association, “account for the largest proportion of consumer debt, with 85 percent of indebted Canadians reporting that they have outstanding debt on a credit card.”

 

This information and much more besides is contained in an August 2010 report published by the CGAAC.

 

Credit Card Debt

is the Most Expensive

Increasingly, consumers are viewing money borrowed on a credit card as income. It is not. As a 2009 CGAAC report says, “Canadian households are financing consumption activity and fuelling gross domestic product growth with unearned money as families increasingly reach for credit to finance day-to-day living expenses.”

 

More than half of the country’s households (58 percent) are using debt to pay for everyday expenditures. This is up from 52 percent in 2007.

 

But, using credit cards for purchasing goods and services can double their cost. Assume a balance on a card of $5,000 at an interest rate of 14 percent. Just paying the monthly minimum off the balance will mean interest costs of $5,887 by the time the debt is paid off. And, it will take 22 years to extinguish the balance.

 

Missing Credit Card Payments Leads to Trouble

Laurie Campbell is executive director at Credit Canada, a not-for-profit credit counselling agency; in an interview with The Globe and Mail (June 2009) she warned consumers of the hazards of skipping credit card payments.

 

Missing even one month’s payments can lead to a note going on a borrower’s credit file, which can negatively affect the ability to borrow. Miss a second payment and an automatic increase in the interest rate on the card of up to five percent is triggered; it’s perfectly legal and is written in the small print of most card agreements.

 

Failing to pay for three months in a row and the bank or card issuer is likely to hand the debt over to a collection agency.

 

Time to Call a Credit Counselor

Laurie Campbell says she is seeing increasing numbers of creditors applying to have wages garnisheed.

 

As Ms. Campbell told The Globe and Mail: “I have a feeling that creditors are not going to wait, in this climate. They know there are going to be about 10 other creditors behind them. If they don’t get in there first and get that garnishment, then they’ll have to wait in line.”

 

At this stage, the best move for consumers in debt trouble is to seek out a credit counselor. Many are non-profit agencies that can act as an intermediary between debtor and creditor to work out a manageable budget and repayment program.

 

Debt is Entrapping many People

Ms. Campbell is seeing increasing numbers of people trying to carry $20,000 or $30,000 on their credit cards. “Debt has no boundaries,” she says. “We see people on social assistance, we see doctor and lawyers. We’re seeing more professionals.”

 

The best advice is to only use credit cards when absolutely necessary and to pay off the monthly balance in full. If paying off the balance is not possible then negotiating a line of credit from a bank is a good option.

 

Lines of credit carry lower interest rates than credit cards and the money can be used to pay off the high-interest card.

 

This, coupled with a more disciplined approach to spending, is the best way to get off the debt treadmill.

 

 

Image Credits

Alan Cleaver

Nacu

 

“Where is the Money Now?” Certified General Accountants Association of Canada, August 2010.

“The High Costs of Missed Card Payments.” Rob Carrick, Globe and Mail, June 2, 2009.

 

© Canada and the World, September 2010

All rights reserved

NUMBERS FROM ACCOUNTANTS

 

Household debt in 2009 was 2.5 times higher than in 1989.

 

Personal lines of credit and credit cards account for 77.% of household debt, up from 21.1% in 1989.

 

Canadians have the highest consumer debt-to-financial assets ratio among 20 OECD nations surveyed.

 

In 2010, 38%  of Canadians said their debt has increased, compared with only 33% whose debt load decreased.

 

The debt-to-income ratio reached a new record high of 144.4% at the end of 2009

 

Certified General Accountants Association of Canada

 

 

 

According to the Globe and Mail (September 14, 2010) The Credit Counselling Service in the Vancouver suburb of New Westminster in 2008, “had 7,000 new clients, which spiked roughly 50 percent to 10,000 in 2009. This year, it is up another five percent.”