Are you one of the many Canadians dreading the sight of a credit card bill in the mail? You’re not alone. The grand majority of Canadians have at least one credit card, and the resulting amount of combined debt numbers in the hundred-million-dollar range annually. Not surprisingly, these high figures can lead to alarming amounts of credit card debt: $74-billion in 2012 to be precise, according to the CBC. If credit cards are such a convenient choice for consumers, why are they getting into so much trouble with them? Let’s look at some of the costs of credit that you may not be aware of.
Everyone knows that credit cards come with interest fees, but do you know exactly how much you’re paying in interest when you don’t pay your balance in full? Credit card fees are notoriously high -- up to 25 per cent.
And even more interest fees
Paying 25 per cent on your outstanding balance is hard enough, but that’s not even the only interest fee you’ll be paying. Credit card companies often increase the interest rate on overdue accounts on standard credit cards. Rate increases can also occur on accounts that have exceeded the approved credit limit. To put it simply: You could be paying more fees than you bargained for.
Some credit cards come with no annual fees, but the most enticing cards -- the ones that offer you loads of travel benefits and other rewards -- usually come with a price tag of up to $120 annually per card. According to the Globe and Mail, credit card companies in Canada earn $5-billion dollars per year from annual fees. Are they worth it? Sure, you may be able to fly to Hawaii once every two years on your credit card points, but consumers need to consider whether the savings justify the fees.
It doesn’t cost you money to use your credit card at a store, but what you may not know is that the store does have to pay a fee (up to three per cent depending on the card) and while a ruling by a federal Competition Tribunal last year stated that merchants are no longer allowed to add a surcharge to your bill when you pay with your credit card, don’t assume you’re getting away scot-free. Instead of blatantly charging you extra for using your card, businesses recover this cost by raising prices for all consumers. According to the Credit Free Friday website, “Whether businesses raise prices or simply absorb the cost, excessive use of credit cards hurts businesses and drives up prices for consumers. Consumers think they are getting free rewards, but the money is coming out of their own pockets.” Debit transactions, on the other hand, only cost merchants between five and 10 cents per transaction.
Credit card fraud is rampant worldwide and it continues to grow each year. In 2012, credit card fraud amounted to nearly $440-million in Canada. Banks and credit card companies need to cover themselves against these losses, which they do with high interest rates, annual fees and merchant costs. Debit card fraud, on the other hand, costs Canadians a fraction as much with $70,000 in losses in 2012.
The cost to your credit rating
Credit cards make it very easy for you to spend money you don’t have, but if you can’t pay that money back it won’t be nearly as easy to recover your financial reputation. Any and all missed payments result in a ding to your credit score, and these minor blips can haunt you for years, making it difficult to secure loans and mortgages when you really need them.
Bottom line: Read the fine print
On a purely technical level, credit cards can’t do anything without your consent.
That being said, the fine print is often extremely hard to read, and buried in jargon and legalese; it is all too easy for the average consumer to miss something before signing up. So before you pull out your plastic, you may want to first consider the impact that your credit card can have on Canada’s independent businesses and merchants.