There are a lot of things that separate the financially well off from the people who struggle to get by. And a lot of it can be blamed on circumstances outside your control – medical bills, family emergencies, etc.
But, what factors are within your control? If you placed two young people in their late-twenties, early-thirties who both had good jobs and aren’t plagued by financial hardship side-by-side, how do you tell who’s going to be better off financially in ten years?
It’s the one who’s better at thinking long term. Moreover, it’s the one who can make sacrifices now for the benefit of their long-term viability and security.
Let’s talk about credit card debt. And, more importantly, the credit card you should have in your wallet if you want to best manage – or pay down – your existing credit card balance.
If you want to create wealth, it’s an important discussion to have. 89% of Canadians have a credit card. On average we have two. And we tend to carry a balance (between $2,627 and $3954, depending on the source), which means we’re consistently paying a substantial amount of interest.
Taking on debt means borrowing money from our future selves. To put your future self in the best financial spot possible, start taking care of your credit card debt now.
The benefits of little to no credit card debt
Having little credit card debt benefits you in two ways: you avoid paying interest and it’s good for your credit score.
Credit card interest
The average credit card comes with an interest rate around 19-20%. Typically, you don’t start paying that interest on your purchases for thirty days. But, 40% of Canadian credit card holders carry a balance on their credit card from month to month.
What many people don’t know is that your interest accumulates daily once it starts.
If we take the typical 20% Annual Percentage Rate (your credit card interest rate) and divide it by 365, we have a daily rate of 0.0548%.
If you have a balance of $3000 when the interest kicks in, you have a new balance of $3001.64. One day later, when the interest is calculated again, you’re up to $3003.29 – plus any additional purchases or minus a payment. This cycle repeats until the end of your monthly statement cycle.
Your $3000 balance has become $3048.04 without you even buying anything.
It’s not hard to think of ways in which you could better spend that money. You could be putting $50 dollars a month away for a vacation, an emergency fund, investments, or towards your retirement.
The two credit bureaus in Canada – TransUnion and Equifax – use five factors to calculate your credit score.
- Credit utilization ratio
The amount of credit you have used divided by the amount you haven’t used.
- Length of history
How long you’ve been using credit.
- New credit
Credit you have applied in the last six months.
- History of payment
How well you’ve been able to pay off your credit.
- Type of credit being used
What type of credit you’re using. Credit card versus mortgage versus line of credit, etc.
Credit card debt can affect all five factors. If you constantly keep your credit card towards its maximum, you can get dinged – it accounts for 30% of your credit rating.
If you’ve racked up a lot on your credit card on the last six months without consistently paying it down, you can get dinged – it accounts for 10% of your score.
If you have missed payments, you can really get dinged – it accounts for 35% of your credit score.
And, a lot of credit card debt can hurt you in comparison to other, better, types of debt. This factor accounts for 10% of your credit score.
What do you do?
If you’re one of the many Canadians who carries a balance on your credit card and you want to make stop borrowing from your future, you want to alleviate yourself from credit card debt.
A good credit card with low interest can make it easier to do that.
I found this list of the best low interest credit cards in Canada in 2018 from greedyrates.ca. Here are the cards at the top of the list.
- American Express Essential Card
This card has a fixed interest rate of 8.99%. It’s the lowest fixed rate in the country. It also has a 1.99% balance transfer fee for the first 6 months – making it easy to consolidate your credit card debt – and a 0% balance transfer fee.
- Scotiabank Value Visa
The Scotiabank Value Visa does have an annual fee of $29 and the interest rate is a little higher than the American Express Essential Card at 11.99%.
The Scotiabank Value Visa does make up for it with some other promotions, however. There’s a promotional interest rate of 0.99% for the first six months, the 0.99% applies to balance transfers and cash advances in the first six months, and you receive up to 20% of AVIS car rentals.
- BMO Preferred MasterCard
This MasterCard has an interest rate of 11.90% with an introductory rate of 3.99% for the first nine months.
The annual fee is a little higher than the first two at $99.
- RBC Cash Back MasterCard
The RBC Cash Back MasterCard has no annual fee and offers a 1.9% interest rate for the first 10 months. It also comes with some cash back perks: 2% on groceries and 1% on everything else.
Wealth is about thinking long term. Managing credit card debt is one of those decisions that can have a huge impact on savings and your future financial situation. Make the good choice and get on top of it now.
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Have a great week!