BUSINESS

Young Canadians may be unaware of consequences of active credit card use: TD

06/19/2012 05:11 EDT | Updated 08/19/2012 05:12 EDT
TORONTO - A new survey of young Canadians suggests the respondents believe there are benefits to giving their credit cards an active workout, but they may be overlooking some of the consequences when it's time to pay up.

The TD Canada Trust Credit Cards and You poll, which surveyed 239 Canadians aged 18 to 34, finds that more than half of respondents are not paying their credit card balances in full at the end of each month.

About four-in-10 are making only the minimum monthly payment and 23 per cent said they have missed a monthly payment.

Another 18 per cent admit to using their credit card to supplement income and 14 per cent said they routinely max out one credit card and need another as backup.

Results of the survey also showed young Canadians are seeing financial benefits of credit card use.

About six-in-10 respondents said they are using their cards to earn points toward travel or other purchases, and 59 per cent said they use them to build their credit rating.

Meanwhile, 36 per cent of the respondents to the telephone poll released Tuesday replied that they track spending through their cards and 28 per cent said they use cards to manage cash flow.

"A credit card is a great tool to manage and track your spending," said Stephen Menon, associate vice-president of credit cards at 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."

However, he added that benefits of their use may be outweighed if you are taking on too much debt.

"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," Menon said.

"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."

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, Menon said.

If you're carrying a $2,000 balance at 19.99 per cent interest rate and only making the minimum payment every month, it will take you more than seven years and over $4,000 including interest to pay it off.

If you can't be disciplined about paying your bill, consider setting up a preauthorized payment to make sure you always pay off your minimum or entire balance due.

Here are some of TD's conditions of using a credit card that younger people may not be aware of:

— Credit cards 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.

— Failure to make a minimum payment within 30 days can result in an interest rate hike and the loss of any promotional rates you're getting.

— There are different rules for different types of transactions. Cash advances, including credit card cheques and balance transfers typically have a higher interest rate than purchases and interest is usually charged from the day of the transaction.