Credit Card Debt – Take Control - Part 2

In Credit Card Debt - Take Control - Part 1, we discussed better management of credit card debt – by using your credit card statements to understand how you use/overuse credit.

In this article, we will discuss the nitty-gritty of credit card statements and how you can use them to reduce your credit card debt.

Over the years, the Canadian government has passed legislation requiring Canadian banks (and other federally regulated institutions) to disclose more information on credit card statements. The goal of this legislation is to help protect and better inform credit card holders.

You can take advantage of this legislation and cut down on the amount of interest you pay the credit card companies, by carefully monitoring your credit card statements and taking the right actions.

Credit Card Purchases and Cash Advances

There is a substantial difference in interest costs between regular credit card purchases and cash advances. Your credit card statement will show you the different interest rates you pay for purchases and for advances. Somewhere on your statement, it will say something to the effect of – you will start paying interest on cash advances from the day they are taken.

Perhaps just as alarming for purchases, if a balance is carried forward on a purchase from one month to the next – then interest on the purchase will be billed retroactively to the date of the purchase!

How are Credit Card Payments Applied?

Your credit card statement does not show you which of your earlier transactions your payments have been put towards. You are also not told which previous transactions your interest charges are for.

Fortunately in 2009, the federal government passed legislation that requires credit card companies to “Lower interest costs by mandating allocations of payments in favour of the consumer”

Because you cannot see what specific items you are paying interest on, you are relying on the accuracy of the credit card company. Now, there’s a comforting thought.

Minimum Monthly Payments – Do the Math

Another requirement of the 2009 legislation was that credit card statements “Inform consumers how long it would take to fully repay their balance if they only make a minimum payment every month”. This is one of the greatest deterrents (besides the actual long-term costs) against only making minimum payments.

Take the time to find this information on your credit card statement. It can take awhile, as it tends to be hard to find, but once you have found it do the math.

For example, if your interest rate is 19.99% (interest rates appear on your statement) and you owe $476.00 with a minimum monthly payment of $10.00 – and it will take you 8 years to repay your debt then the total cost will be approximately $10.00 x 96 months = $ 960.00. Yeeks! That works out to approximately $484.00 in interest on a $476.00 balance - you would be paying more interest than your starting balance!

To put it another way – if you pay off your full balance of $476.00 rather than just make minimum payments – you will save yourself approximately $484.00!

The Financial Consumer Agency of Canada has a handy minimum payment calculator.

Even if you cannot pay the full $476.60 – pay as much as possible. For example if you pay $20 per month on the starting balance of $476.00 – it will take you 2 years and 7 months to pay off your balance at a total cost of $612.33 of which, $135.73 would be interest.

Make it Easy on Yourself

Avoid the worry and hassle of credit card debt, by paying off your credit card balance in full every month.

If you are not in a position to pay if off immediately – set up a plan of repayment, and stick to it. There are a number of plans – the two most popular are the snowball method and the highest-interest-first method. Each plan has benefits, the snowball method tends to show immediate results, but over the long haul, the highest-interest-first method saves the most money.

It will help you greatly if you stop using credit cards until you can pay them off in full, every month – without causing stress.