Canadians stuck in credit card debt cycle
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Credit card debt seems to be the hardest debt cycle for Canadians to break. Credit card debt is what’s considered revolving debt, meaning you can immediately re-borrow what you pay back on principal. This type of debt has been psychologically proven to keep people in debt, because it makes it easy to spend — it’s less psychologically painful to swipe a card than physically use cash — and encourages overspending. According to a recent study, consumers spend 12 to 18 per cent more when using a credit card as their payment method.
CANADIANS STUCK IN THE CREDIT CARD DEBT CYCLE
As of 2016, Canadian households owed a total of $2.03 trillion, an increase of nearly $30 billion in the last three months of 2016; $596.5 billion of that is in consumer debt, largely made up of credit card debt.*
According to Credit Cards Canada’s website, in 2016, the average credit card debt per Canadian was $3,954.
FEWER CARDS, BUT HIGHER DEBT
Interestingly, Canadians had fewer active credit cards compared to the previous year, but they are borrowing more on the active cards they do have (according to a recent report by TransUnion). The average card balance per consumer rose 2.3 per cent in the last three months of 2016 from a year earlier.
CONSUMERS UNAWARE OF IMPACT
Despite the fact that Canadians are struggling to manage the debt they have, many remain unfazed or unaware of the greater impact of carrying debt, especially credit card debt.
And, for many, the use of a credit card is what’s keeping them afloat.
According to a 2016 survey, “31 per cent of millennial respondents feel it’s not a ‘big deal’ if they carry a balance on their credit cards.”
Carrying a credit card balance or missing payments has a negative impact on your credit score, which in turn can impact your chances of borrowing in the future; for example, when applying for a mortgage.
When it comes to missing minimum payments, it doesn’t matter whether it’s a $4 or $400 payment, the impact is the same. Approximately 35 per cent of your credit score is made up of your payment history, so missing even one payment will affect it. And, your history of missing payments stays on your credit bureau for six years.
The good news is when you start making your payments on time and start practising good utilization ratio habits, your score can immediately improve.
Your utilization ratio is your level of indebtedness, or how much of your total available credit you’re using, and it makes up approximately 30 per cent of your credit score.
If your credit card limit is $1,000 and your balance is $1,000, your utilization ratio is 100 per cent — and this is not good in the eyes of the credit bureau.
If you carry a balance on your credit card, try to keep it under 35 per cent of your total limit. There are two reasons for this: First, this is close to the magic number the credit bureau likes to see for utilization ratio and contributes to a strong credit score.
The other reason is that it helps you put a limit on racking up debt that might not be manageable.
As consumers, we’re all responsible for setting these imaginary limits for ourselves to stay in control and get out of the revolving debt cycle.
* According to a Statistics Canada report released on March 15, 2017.