04/21/2015 01:25 EDT | Updated 06/21/2015 05:59 EDT

The Good, Bad and the Ugly of Plastic

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I'm not so sure that cash is king anymore.

With debit and credit machines now ubiquitous in shops and stores across Canada, I see fewer and fewer people reaching into their pockets to fish out a good old-fashioned handful of change. Waiters regularly come to tables armed with wireless payment options. And thanks to the "tap" function, we don't even have to bother with PIN codes and signatures anymore.

The convenience of plastic has usurped cash from its throne. Soon enough, mobile payments will mount a full-on coup d'état on plastic itself, with nearly two-thirds of Canadians saying they are envious when they see other people using their mobile phones to pay and wish that they could do the same.

Recently, there has been chatter that one of the last bastions of the cheque book - rent and utilities - is falling to credit's blitz. Third-party companies like Plastiq and RentMoola have set up services that allow people to pay rent, condo fees, and utilities with credit.

Before you think this is just another a sooth-saying blog from a member of the financial community about the dangers of credit and debt, let me assure you that credit, in and of itself, is not inherently bad. It serves an important purpose and facilitates plenty of financial necessities. There is indeed some good, some bad, and some ugly involved in going full plastic.

The good

Third-party credit card payment companies trumpet the bonus of gaining extra rewards from your credit card by using it to pay major expenses like monthly rent. This is certainly attractive - a recent study by American Express found that rewards are important to 68 per cent of Canadians. Using the American Express Air Miles credit card to pay rent, at $1200 per month, earning one air mile for every $20 you spend, you will earn an extra 720 Air Miles in one year -enough for a one-way flight between Toronto and Ottawa.

Responsible and regular credit use can also be good for your credit score. "Credit history" makes up the biggest chunk of your score (35 per cent), so making timely, regular payments will help build your credit profile. If you are never late with rent, and have the money set aside each month, you could safely switch to credit. In theory, at least.

The bad

Aside from the cost of ordering personal cheques or an e-transfer fee, paying rent should not cost you extra. If you want to use credit, you'll be paying a percentage to the third-party company. RentMoola charges a 2.75 per cent service fee on rent payments. Over the course of a year, using the same rent of $1,200 from above, you're paying an extra $396 for the privilege of using your credit card. It puts the free trip to Ottawa into perspective, doesn't it?

And then there's the interest. If you happen to slip one month, and fail to pay off your credit card balance in full, 2.75 per cent is just the beginning. Taking the same American Express Air Miles card from above, with its 19.99% APR, allowing your $1200 to accumulate a month's worth of interest will find you paying an extra $20 in the first month you carry it over. Add on your 2.75 per cent service fee, and your rent just jumped to $1253.

The ugly

Slipping up for one month won't cost you a lot in the grand scheme of things, but what if it happens more than once? What if there's a sudden job loss or disability? Big-ticket items like rent can really put your credit card in the line of fire, and if you can't keep up with full, monthly payments, you might get burned. Bouncing some rent cheques might have your landlord knocking on your door, but bearing the brunt with your credit card might have much larger implications.

Carrying a large credit card balance will hurt your credit score because 30 per cent of the score focuses on your "Credit Utilization Ratio" which looks at the amount of credit you are using versus how much you have available. If you come close to maxing out your card, which can happen very quickly with hefty rent bills, your credit score will suffer. And then there's the snowballing interest. A credit card debt calculator can show you just how quickly things can get out of control.

So you need to ask yourself -- are the risks worth the rewards?


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