TORONTO, June 19, 2012 – While most younger Canadians know the benefits of credit cards, they may not be as mindful of the potential pitfalls. According to the TD Canada Trust Credit Cards and You poll, many charge purchases to their cards and reap the benefits, but some overlook the consequences when the bill comes due.
“A credit card is a great tool to manage and track your spending,” says Stephen Menon, Associate Vice President, Credit Cards, TD Canada Trust. “Using your first credit card responsibly is a smart way to establish a strong credit rating and help set yourself up for an attractive interest rate when you apply for your first car loan or mortgage. A credit card can also maximize your spending power if you choose a card that comes with travel, cash back or car rewards.”
Results of the poll showed that Canadians surveyed aged 18-34 are taking advantage of these benefits, using their credit cards to earn points towards travel or other purchases (60%), build their credit rating (59%), track spending (36%) or manage cash flow (28%).
“Credit cards can also protect your purchases from breakage, loss and theft, as well as reimburse you for expenses due to travel delays and cancellations,” adds Menon. “They can be safer to carry than cash, and allow you to shop online and internationally. But all of these benefits may be outweighed if you’re taking on too much credit card debt.”
When asked, respondents acknowledged having engaged in the following behaviour:
Not paying their credit card balance in full at the end of the month (51%)
Making only the minimum monthly payment (40%)
Missing a monthly payment (23%)
Using their credit card to supplement their income (18%)
Routinely maxing out one credit card and needing another as backup (14%)
“Credit cards have lots of benefits,” says Menon, “but getting in over your head isn’t one of them. Credit cards can be a cost-effective and convenient way of accessing short-term financing. For instance, it may make sense for you to make a large purchase with your credit card, benefit from the points earned on that purchase and the purchase warranty insurance that covers your purchase, and then pay it off in increments over the course of a few months. This lets you maximize the benefits for what should be a relatively small interest payment.”
“However, credit cards should not be used as a means for perpetual, permanent borrowing. For instance, be wary of permanently carrying a balance; having maxed out your limit and being unable to pay it back; or using your card to finance a lifestyle you can’t afford.”
Menon advises that using your credit card responsibly requires understanding the costs of borrowing. Some conditions of using a credit card that younger people may not be aware of:
Late or partial payment of your balance
Credit cards essentially offer customers an interest-free loan for 21 days, but only if you pay your balance in full by the due date. If you make your payment even one day later, you will be charged interest on your purchases from the day they were made or posted.
If you do not make your minimum monthly payment within 30 days of the due date, your monthly interest rate may increase and you could lose any promotional rates you are receiving. Your monthly interest rate would not revert back to the original rate until you’ve made your minimum monthly payment on time for a certain number of months in a row.
Rules for different types of transactions
Payments made are not necessarily applied in the same order as when original purchases or other transactions are made on your card, but rather proportionately, based on the category of transaction (e.g. cash advances, purchases, fees) and on the interest rate that applies to the amounts in those categories.
Cash advances, including credit card cheques and balance transfers, typically have a higher interest rate than purchases and interest is charged from the day of the transaction. Promotional rates usually have an end date and then any amount left unpaid reverts to the higher rate once the period is over.
Tips for credit card use
Understand the cost of borrowing by reading your cardholder agreement and other disclosure material provided by the credit card issuer, or talking to your credit card company, or a financial advisor.
If you’re finding that you can’t be disciplined about your credit card use, consider setting up a preauthorized payment to make sure you always pay off your minimum or entire balance due.
Pay off any outstanding credit card debt as fast as you can. If you’re only paying the minimum monthly balance, try doubling up to accelerate your debt reduction.
“If you’ve not always used your credit card wisely, resolve to change your ways in the future,” says Menon. “Pay off any outstanding credit card debt as fast as you can, because permanently carrying a balance can be very expensive. For instance if you’re carrying a $2,000 balance at a 19.99% interest rate and only making the minimum monthly payment every month, it will take you more than 7 years and over $4,000 including interest to pay off”.
“Get the greatest benefit from your credit card by making sure you are using it to your advantage, not the other way around,” adds Menon.
About the TD Credit Cards and You Poll:
From February 13 to February 22, 2012, Research House conducted a telephone survey among 1,001 randomly selected Canadians 18 years of age or older. The data presented is based on the 239 respondents under 35 years of age who indicated they have at least one credit card.
About TD Canada Trust
TD Canada Trust offers personal and business banking to more than 11.5 million customers. We provide a wide range of products and services from chequing and savings accounts, to credit cards, mortgages and business banking, to credit protection and travel medical insurance, as well as advice on managing everyday finances. TD Canada Trust makes banking comfortable with award-winning service and convenience through 24/7 mobile, internet, telephone and ATM banking, as well as in over 1,100 branches, with convenient hours to serve customers better. For more information, please visit: www.tdcanadatrust.com. TD Canada Trust is the Canadian retail bank of TD Bank Group, the sixth largest bank in North America.
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