Debt is money owed to a person or entity that must be paid off by a set deadline. For example, mortgage loans, student loans, car loans, and credit card balances are types of debt. Chances are that at some point in your life, you will have debt.
Potential pitfalls of carrying
a balance on your card(s):
Credit Cards cost money:
If you pay cash for a $100 item, it costs $100. The cost of a $100 item purchased with your department store credit card, if you pay only the minimum monthly payment (usually 3% of the balance plus interest) over 4 years, is $100 plus $46 of interest and you still owe the credit card company $24. Using the credit card, the item has cost $146 and you are still paying for it! If you do not pay your balance in full each month, credit cards greatly increase the cost of the items you buy.
“Low Introductory Rate” Offers
Can credit card costs be lowered by taking advantage of a “low introductory rate” card? Read the fine print – if it sounds too good to be true, it probably is. Credit card companies want customers that carry balances because they make a lot of money from the interest. Low introductory rates are one-way credit card companies attract desired customers – customers who carry a balance on their cards. You do not want to be a desired customer of a credit card company.
The Snowball Effect
It can happen to anyone – Things are a little tight financially, so you get a cash advance or purchase an item on your credit card, problem solved. But now you have an additional payment next month, and your finances are even tighter. Another cash advance and more purchases on the card, problem solved.
After a number of months, your balance is getting close to your limit but the credit card company bumps your limit, problem solved. The balance gets close to your limit again, but a pre-approved credit card application arrives in the mail, problem solved. The reality is that your finances are out of control, but you convince yourself everything is okay and you keep borrowing.
Before long you have a third card with a balance, and then a fourth. Then, when the next credit application is turned down, you start missing payments and your credit rating drops like a stone: Bankruptcy or a Consumer Proposal becomes your only option.
Financial Consumer Agency of Canada
An independent body working to protect and educate consumers of financial services, established in 2001 by the federal government. For further reading, check out the section on their website entitled Credit Cards and You.