Stop Robbing Peter To Pay Paul

Many of us have been there – we really want something, but don’t have the cash to pay for it. So what’s the harm in putting it on our credit card? And maybe at the end of the month we may not have enough money to pay it off, but you tell yourself “that’s a future you problem”. Fast forward to the end of the month and it turns out you were right, you don’t have enough money in your account to pay your credit card bill. What do you do now? There are many different options that can make sure you can pay for it and you are avoiding the cycle of borrowing from one place to pay for another debt. 


Beware of Shark Infested Water

You’ve seen them popping up everywhere – on the corner, on your TV and in your mailbox: Payday Loan Companies are always there ready to “help” you out with that short term loan, but how much is that “helpful” loan costing you in the end? The answer is… a lot! The annual interest rate on a $300 14-day payday loan from Money Mart in SK is 443.21% at a rate of $17 per $100 borrowed. So that means that your $300 loan will actually cost you $51 and the total amount owed will be $351. For 7% of Canadians, this is an avenue they have gone down and it can be very difficult to get out of the cycle. The best advice? Avoid payday loans entirely.

Just because you can, doesn’t mean you should.

A revolving line of credit, when used properly, can provide peace of mind as you are aware that you will have access to funds if you need them. They can definitely be beneficial, but the goal should not be to be use it every month and should never be included as available money in your budget. It should be used as a safety net and something you access as a last resort because you do pay interest on the amount that you use.

Have you ever been stuck in a revolving door?

Would you borrow from your grandma to pay your friend back? Then borrow from another friend to pay your grandma back… and then borrow from… I think you see where I’m going with this.

You’re literally borrowing from one person to pay the other and it has the potential to be a never-ending cycle. The same is true when you take a cash advance from your credit card to pay for something. You are being charged interest as soon as you borrow the money and are left trying to figure out how to pay it back when you didn’t have the money in the first place to buy what you wanted. You can check out Francis’ blog to learn more about Cash Advances.

I could have cruised to Australia for that amount.

If you can’t pay off your credit card every month, you should at least be making the minimum payment. That’s probably good enough, right? The credit card company must be trying to help you if they put a minimum payment on there, right? No, they’re not. While paying the minimum is important, it is the bare minimum you should be doing and doing that will not get you that far ahead.

Here’s an example to show why this is true:

You decide to go on a $2,500 vacation, but you’re going to put it on your credit card and pay the minimum balance. It shouldn’t take that long to pay it off and it won’t cost too much, right? Not quite. It will actually take 334 months to pay it off and the total cost of the trip will be $8,400! WHAT?! Yup, of the $50 minimum payment, only $12 goes to principle.

I don’t know about you, but I’ve never taken a vacation that was worth triple for what I paid for it.

Using credit cards is very common for Canadians, with 92% saying they use their card every month, so it’s important to know as much as possible about them. Here are some stats about credit cards you may not be aware of:

  • One in seven Canadians use credit to buy daily essentials such as groceries because they are short on cash.
    • Nearly one in ten admit to being impulsive shoppers, which leads to buying things they cannot afford.
  • More than two in three Canadians don’t know that credit card interest is calculated daily on the balance and one in three Canadians admit they were somewhat unlikely or unlikely to make the minimum credit card payment
  • Transunion identifies the average credit card balance as $4,265 in Canada.

At the end of the day, or month, you want to make sure that you are borrowing wisely and making the best decision for you and your financial well-being. The best choice is always to have the cash to pay for something. There are benefits to using credit cards such as building your credit score and some cards have great perks. However, if you aren’t able to pay off your card in full each month, it negates the benefits you will have gained.

Some tips to break the borrowing cycle:

  • Shop around and understand the terms and conditions before you sign the loan contract. Specifically, look for interest rates and the repercussions of missing a payment.
  • Don’t use your credit card to spend more money than you have. It should be used as a tool to help you make purchases that are within your budget.
  • Save up for bigger purchases rather than purchasing on your credit card. Once you have enough cash, purchase it on your credit card to take advantage of points perks but make sure to pay that off immediately.
  • Pay your credit card balance every month in full. If this isn’t possible, shrink the amount of times you pull out your credit card and increase the amount you use your debit card.
  • Don’t use your credit card to take out cash. This is known as a cash advance and works differently than a purchase made on your credit card. The biggest difference is that interest is calculated the moment the money comes out of ATM until it’s paid back.
  • DO NOT use payday loans. Ever.

With the Holiday season coming, it’s really important to make sure you’re borrowing wisely, but also that you’re spending wisely too. Checking out Courtney’s blog about Christmas Budgeting will give you some great tips on how to stay within what you can afford this Christmas. And don’t forget that Giving the Gift of Time and DIY Gifts are two great options too! Have any advice of your own? List it below!

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