If you pay off your full statement balance on time each month, you can avoid paying any interest on those purchases.
But if you’ve got a big purchase coming up and you don’t have the cash on hand to pay for all of it at once, consider looking around for a better deal. Some cards come with an introductory APR for purchases that can help you save money on interest — as long as you pay your purchases off on time and in full before the introductory period ends.
Here’s some key things to know about how purchase APR works and how an introductory purchase APR offer can help you pay off new purchases with low-to-no interest.
Credit card companies charge interest according to a card’s annual percentage rates. There are several different types of interest rates that you may be charged by your credit card company.
The purchase APR is the rate of interest the credit card company charges on purchases you make with the card if you carry a balance on the card, which is what it’s called when you don’t pay off your balance on your monthly statement and roll it over onto the next month’s bill.
But some credit cards come with purchase APR promotions that offer an introductory purchase APR or low interest rate on new purchases made with the card for a set amount of time. You may see intro APRs for purchases that last anywhere from just a few months to 21 months or more.
An introductory purchase APR offer can give you a way to pay off new purchases at a lower interest rate, sometimes even as little as 0%. Once the promotional time frame ends, the regular purchase APR will take effect. This is usually a higher interest rate that you’ll begin paying on both new purchases and existing purchases that you haven’t paid off before the intro period ended.
Possibly hundreds of dollars or more, depending on your situation.
For example, let’s say you use Card A, which has a relatively high purchase APR of 19%, to buy $3,000 worth of furniture. If you made monthly payments of about $193 for 18 months, you’d pay the balance off assuming you didn’t make any additional purchases on the card. But you’d also pay around $471 in interest thanks to the regular purchase APR.
On the other hand, if you can use Card B, which is offering an introductory 0% purchase APR for the first 18 months you have the card, you could make 18 monthly payments of about $167 and pay off the balance without paying a penny of interest if you make timely monthly payments.
You’ll want to take a look at a couple of factors before applying for a card with an intro purchase APR offer. Here are a few things to check for …
A promotional purchase APR offer can give you some breathing room to pay off large purchases without forking over hundreds of dollars in interest. But what happens if you can’t pay off your balance before the introductory period ends?
If you’re not careful, you could wind up owing interest on those purchases anyway.
“This could easily result in hundreds of dollars of interest payments if you struggle to pay the full balance for several months,” says Alex Miller, founder of the rewards strategy website Upgraded Points.
You should read the card’s terms and conditions to find out whether the regular purchase APR that takes effect after the promotional period ends is variable, meaning it can change from month to month with the prime rate. This can give you a better idea of what to expect if you carry a balance later.
If you don’t make your monthly minimum payment by the due date on your statement each month, it’s possible to lose the introductory purchase APR. You could also lose the promotional rate for some intro purchase APR offers if — for example — you go over your card’s credit limit, make a late payment or break other card terms.
“Be sure to spend less than the credit limit offered by your card as well as pay at least the minimum payment, on time, each month,” Miller recommends.
Before you apply for a card with an introductory purchase APR offer, read the card’s terms and conditions to find out how long the intro period lasts and what the regular purchase APR will be once the introductory period ends.
A key to making any intro APR offer work in your favor is paying off the balance before the intro period ends.
In an ideal world, you’d never miss a monthly payment or carry a balance on your credit cards. Many Canadians, however, do carry a credit card balance from month to month. According to the 2019 Canadian Financial Capability Survey by the Financial Consumer Agency of Canada, 29% of Canadians carry outstanding balances on their credit cards.
So, what’s the problem with carrying a balance? In many cases, it boils down to three letters: APR.
Most credit cards come with an interest rate. Simply put, this is the price you’ll pay for borrowing money.
For credit cards, interest is typically expressed as a yearly rate known as the annual percentage rate, or APR. Though APR is expressed as an annual rate, credit card companies use it to calculate the interest charged during your monthly statement period.
There are other details in your card’s fine print you should review to understand how much you could pay in fees if you’re not careful. Here’s what you need to know.
A credit card can either have a fixed APR or a variable APR. A fixed APR typically remains the same, but it can change in certain circumstances, such as if your payment is more than 60 days late or when an introductory offer expires. A variable APR usually changes with the prime rate. Many variable interest rates start with the prime rate, then add a margin. The result is your variable APR.
Credit cards generally have several different types of APR you’ll want to look out for.
The purchase APR will be used to calculate how much interest you will pay on an outstanding purchase balance, if you have one. If you have excellent credit (generally scores of 800 or higher), you may be more likely to qualify for a lower interest rate because a credit card company may consider you a lower-risk customer.
If you have poor or fair credit (generally scores between 300 and 649), you may get a higher interest rate if you are approved for the card. This means it’ll cost you more every time you carry a balance with your card, so be sure to pay off your balance on time and in full every month, if possible.
To calculate how much interest you’ll be charged, you’ll need to know your average daily balance, the number of days in your billing cycle and your APR.
Let’s say you have a travel rewards credit card and an average daily purchase balance of $1,500 at the end of your 30-day billing cycle. You also have a variable purchase APR of 15.99%.
Here’s how to calculate your interest charge (numbers are approximate).
The math requires some work, but the concept is simple: Carry a balance, and you’ll pay interest.
Credit card companies generally give you at least a 21-day grace period between the purchase date and when the payment is due. If you pay off your balance in full and don’t have any cash advances outstanding, you won’t be charged interest on new purchases made during this interval.
Even if you can’t pay off your balance in full, consider paying off as much as you can to avoid late fees and reduce the overall balance subject to interest. The minimum payment is typically up to 3% of the outstanding balance.
Before you sign up for any card, know the interest rates and whether they are fixed or variable, and understand the factors that can allow your credit card company to change it.
Note that introductory APR periods don’t last forever. Also, if you pay more than 60 days late, you could be subject to a penalty APR, meaning you’ll be charged higher interest for several months or longer. (The good news? If you make six consecutive on-time payments, your credit card company may be willing to adjust the rate.) Paying on time is a good practice in general.
Consolidating credit card debt is when you combine multiple credit card balances into a single monthly payment that ideally has a lower interest rate than what you’re currently paying.
But consolidating your debt takes time, and many methods require an application process to see whether you’re approved first, which usually results in a hard credit inquiry that can cause your credit scores to drop a few points.
To help you decide if credit card consolidation is right for you, here are several methods to consider.
Credit counseling organizations can review your entire financial situation and work with you to create a plan to tackle your financial challenges. They give advice about credit issues, budgeting, money management and debt management.
If you work with a credit counselor, it’s important to research the organization before you get started.
Pros: A credit counseling organization may work with your creditors to set up a debt-management plan on your behalf, which requires you to make a single monthly payment to the credit counseling organization each month. The organization then uses the money you provide to pay your creditors. Your credit counselor may also work with your creditors to negotiate lower interest rates or waive certain fees.
Cons: Some credit counselors may charge a fee for some of their services, and you may have to agree not to apply for new credit or use your existing credit if you participate in a debt-management plan.
A personal loan can be used to consolidate debt, and the funds from a debt-consolidation loan can be used to pay off your credit card balances. So instead of making multiple credit card payments each month, you make one payment for the personal loan.
Pros: If you have good credit, you may qualify for a lower interest rate on a personal loan than the rates your credit card issuers are charging. Personal loans offer flexible repayment terms, so you can select the one that’s right for your budget. Plus, some lenders will send payment directly to your creditors, so you won’t be tempted to use the loan funds for something else. And many lenders offer the option of applying for prequalification, so you can shop around to see what your potential options are without impacting your credit scores.
Cons: You need to meet the lender’s eligibility requirements to qualify for a personal loan. If you’ve had financial difficulties in the past, you may not be eligible, or you may only qualify for an interest rate that’s comparable to the current rate on your credit cards. In addition, some lenders charge an origination fee, which could add hundreds of dollars to the cost of your loan, which could eat into your loan funds before you even receive them.
A balance transfer lets you move balances from one or more credit card accounts to a different card. Balance transfer credit cards often offer an introductory 0% APR on balances you transfer within a certain amount of time.
Pros: If you pay off the balances you transfer before the introductory period expires, you could avoid paying interest charges on the transferred balance altogether.
Cons: The promotional period is limited. If you don’t pay off the amount you transfer (in full and on time) before the intro period ends, the remaining balance will accrue interest at the card’s regular rate.
In addition, some cards charge a balance transfer fee, which will add to the debt you must repay. Also, the amount you transfer — including any fees charged — can’t be higher than your credit limit, which may not be high enough for you to pay off all your debt.
Keep in mind that you may not be allowed to transfer balances between cards issued by the same lender. And if you opt for a balance transfer, it’s especially important to pay on time because late payments may cancel the introductory APR offer.
Depending on how much money you owe and what your overall financial picture looks like, it may make sense to ask a friend of family member to lend you the money.
But if you opt for this method, it’s important to be sure the loan terms and repayment plan are clearly outlined, just as they would be if you were getting a loan from a financial institution.
Pros: When you borrow money from somebody you know, you don’t have to meet minimum eligibility requirements to qualify for the loan, and you may be able to get a lower interest rate than you would from a bank or credit union.
Cons: Borrowing money from someone you know is tricky because it can put a strain on your relationship. Also, if you’re unable to repay the loan on time, you might be putting their finances at risk.
The following are other credit card consolidation methods that are available, but we don’t recommend them because they’re riskier than the options we’ve discussed above.
Some lenders offer cash-out refinance auto loans that allow you to use the equity in your car to issue you a loan for other expenses, like consolidating credit card debt. But if you’re unable to make your payments, you risk losing your vehicle.
Home equity loans let you borrow against your home’s equity and use the cash to pay for just about anything. This may seem like a good option because these loans often have lower rates than credit cards and personal loans. But if you default on payments, the lender typically has the right to start foreclosure proceedings, and you could lose your home.
Consolidating your credit card debt into a single payment may seem like the solution to your financial troubles, especially if you can get a lower rate.
Before consolidating your credit cards though, come up with a budget that will help you minimize your spending while you’re paying down your debt. Once you have a plan, you can choose the credit card consolidation method that’s right for you. And try to avoid choosing a debt-consolidation method that may put your house or car in danger.
Canceling a credit card might seem like a simple way to move on to a new, better option — or maybe you want to end a relationship with a card that you now realize was too costly and partly to blame for your debt problems. But a closed credit card can stick out like a sore thumb on your credit reports and affect your scores considerably.
That doesn’t mean it’s always a bad idea to close a credit card. But it’s important to know what you’re getting into first. Let’s go over some things you should think about when considering closing a credit card and how it can affect your credit.
If you currently rely on your credit card for common expenses, canceling a card could prompt you to change many of your habits. And even if you have other cards, it’s a good idea to think about how you’ll pay for things after canceling your card.
For instance, if you use your credit card to pay for day-to-day expenses at grocery stores, restaurants and gas stations, you’ll have to figure out a new method of payment. If the card you used previously at those locations earned rewards, you might also be losing out on similar benefits moving forward. If you plan to use another card, look into its features and see if it’s an equally good option.
On the other hand, you might have already decided you prefer to pay with a debit card, check or cash. But each of those options comes with its own specific uses and potential issues, too, so consider what that future might look like before acting.
There are five major factors that influence your credit scores: payment history, amounts owed, length of credit history, new credit and credit mix. Canceling a credit card could affect each of these factors — and in turn, your scores.
Let’s take a look at how canceling a credit card could affect each of these major credit factors.
Making on-time and in-full payments consistently is a common way to use a credit card to build credit. If you’re able to do so, this can be a straightforward way to help your credit.
On the other hand, if you think you might have trouble paying off your balance every month over the long term, closing the card could protect you from future activity that would harm your credit. But if you currently have a balance on your card and want to close the card, you’ll need to discuss your options with your issuer first.
Credit bureaus track the amount of money you owe on your accounts to ensure you’re not using too much of your available credit. Known as your credit utilization rate, this percentage compares the amount of money you owe to the amount of credit that’s available to you. A lower rate is usually better.
If you can only afford to make the minimum payment each month and you’re carrying a balance, your credit utilization rate will stay higher and could hurt your credit scores.
But closing your credit card might only make it worse if it significantly lowers your total available credit. If you’re planning to close a card without opening another line of credit, you could see a major impact to your scores.
A longer active credit history is usually better for your credit. In general, lenders like to see that you have a track record of managing credit effectively over time.
But when you close a credit card, that card stops aging and can’t grow. That will cut into your active credit history for at least as long as it takes to get another account growing.
And if the card you’re thinking of opening was also your first credit card, we strongly recommend keeping it open even if you rarely use it. As your oldest line of credit, it will have the biggest impact on the length of your credit history.
When you apply for a new credit card, you might notice a hard inquiry on your credit reports. This shows that the lender checked your credit before deciding whether to approve your account.
Closing your credit card won’t affect your new credit unless you’re closing it to open a new card. If you feel more comfortable having only one credit card at a time, this might seem like a sensible approach.
We don’t want to discourage you from opening a new credit card that better fits your needs and habits. But you should be aware that the new credit card application will trigger a hard inquiry and affect your scores in the short term. If you go through with that application and close your old account at the same time, that effect could be considerable.
Lenders like to see that you can handle a mix of revolving credit (like a credit card) and installment credit (like a loan with a fixed payment every month).
If you’re thinking of closing your only credit card and not opening another, you could end up removing revolving credit from your reports entirely. In that case, lenders won’t be able to assess the variety of credit you use and might be less likely to work with you.
Even if closing a credit card won’t affect your lifestyle or credit profile too much, it still might be easier not to close the card. In fact, there are several alternatives that could end up being less risky.
● Put the card in a drawer. Maybe you’ve decided you just don’t like using credit cards. If that’s the case, consider keeping the card and putting it away instead of closing it. This course of action might seem obvious, but keeping the account open while removing the temptation to use the card could be a straightforward way to keep the card without harming your credit.
● Find another way to handle mounting debt. If you’re trying to get out of credit card debt and don’t want to add new payments, you might be considering negotiating to close the card account with your issuer. But you might also be able to pay off your debt with a balance transfer credit card or personal loan. These options might offer a more manageable way of paying off your debt.
● Downgrade your card to avoid an annual fee. If you’re paying an annual fee on a card you don’t use, you could ask your credit card company if it can keep the account open while downgrading you to another card with no annual fee.
If you’ve considered all your options and still want to go through with canceling a credit card, here’s how to do it.
● Pay off your remaining credit card balance. Think of canceling your card as a clean break. The last thing you want is to owe money on a credit card that you have to keep paying for after you close it.
● Cancel recurring payments. If you’ve set up any recurring payments for your bills, make sure to update your payment information.
● See if you need to redeem your rewards. Rewards sometimes expire after your card account is closed, so check your program’s terms to see if you need to use your rewards before canceling. If you’re having trouble getting out of debt and have rewards, you might be able to redeem them toward a statement credit to help you pay off your balance.
● Call your credit card issuer. You should be able to find the number for customer service on the back of your card. To start the process, tell them you’d like to cancel your credit card.
● Go to your credit card’s website. Alternatively, if you don’t want to speak with customer service over the phone, you might be able to cancel online after logging into your account.
● Follow up in writing. After you cancel, it’s good practice to send an email or write a letter to your credit card issuer to confirm your card has been canceled. That way, if there’s a mistake and you find out your card is still open, you can document the date you requested the cancellation.
● Double check your credit reports. If you don’t want to take your credit card issuer’s word for it, you can comb through your credit reports to make sure they reflect that your card has been closed.
● Cut it up. A simple but important step. Cutting up your credit card can help make sure no one tries to use it after it’s been closed.
Some people think interest rates and annual percentage rates are the same thing. While that’s typically true for credit cards, the terms have different meanings when it comes to loans. It’s important to realize that they’re different, checking both the interest rate and the APR when you’re considering taking out a loan.
An interest rate is the percentage of the principal that a lender charges you to borrow the money. So what is APR? Instead of just including the interest rate, APR can also include fees you may be required to pay to take out the loan. So APR gives you a better idea of the cost of the loan as a percentage.
Calculating APR isn’t as difficult as you might think. Here’s the formula you would use to calculate the APR of a loan with fees. Note: If a loan doesn’t have fees (and this is rare), you can simply replace the fees placeholder in the formula with a zero.
If that sounds confusing, take a look at how we break it down in the following example.
Let’s say Frank is taking out a $1,000 loan. And over a 180-day loan term, he’ll end up paying $75 in interest. He’ll also pay a $25 origination fee to take out the loan.
Let’s plug those numbers into Frank’s calculator to see how he can calculate his APR.
$75 + $25 = $100
$100 / $1,000 = 0.1
0.1 / 180 = 0.00055556
0.00055556 x 365 = 0.20277778
0.20277778 x 100 = 20.28%
You’ll likely encounter APRs at many points in your life. Mainly, you’ll experience APRs when dealing with credit. Many types of credit products, such as car loans and mortgages, might only have one APR you have to pay attention to, but other types of debt may have multiple APRs.
When you receive credit card offers in the mail, they may list several different APRs. For example, you may see a purchase APR listed in the card’s terms and conditions, but you may also see a balance transfer APR, penalty APR or cash advance APR.
Whenever you take out any type of debt, make sure to find out the different types of APRs you could be charged and what triggers each one. Most of the time, it’s pretty straightforward. That said, if you need help, ask the lender to explain when each APR applies.
It’s super important that you’re aware of the APR you’re paying on any debt you take out, because it’s the price you pay to borrow the money.
In general, you may want to stay away from debt with high APRs, as the interest payments could end up overwhelming your budget. But even if you manage to find debt with low APRs, taking out too much debt could cause headaches.
It’s also important to know the type of APR on your loan. In most cases, you’ll either have a fixed APR or a variable APR.
A fixed APR means the APR doesn’t change based on an index during the life of the loan. Because of this, fixed APRs can be more predictable when it comes to budgeting.
Variable APRs can change and are tied to an index interest rate, such as the prime rate. So if the prime rate increases, so would a variable APR.
Variable APRs can fluctuate either in your favor or against it. So while a variable APR could potentially provide lower interest rates up front, it can also increase as the associated index increases, which is a downside of variable APRs.
Technically, the lender determines what interest rate to offer you when you apply for a loan, which will affect your APR. But there are a number of factors that can play a big part in determining your interest rate, too.
Lenders are likely to consider your credit scores, along with other factors, when offering you an interest rate. Someone with excellent credit scores is likely to get a lower interest rate than someone with lower credit scores for the same loan, assuming all other conditions are the same.
By shopping around for the best loan deal, you may be able to find a lender who can offer you a lower APR.
For example, while one lender may offer you a variable 15% APR loan, another lender might offer you a variable 12% APR loan, even if you apply on the same day with the same exact information. That’s why it can pay to shop around.
It’s important to note that a good APR may be different depending on the type of credit you’re applying for. For instance, the average APR offered on credit cards is generally higher than the average APR offered on mortgages. So while it doesn’t make sense to compare credit card APRs to mortgage APRs, you should compare APRs within the same loan type.
Having a better idea of what APR is can be especially helpful when you’re making a big purchase or getting a credit card. You can use this information to make more-informed decisions, especially when comparing multiple loan options. It’s important to remember that while a lower interest rate may be appealing, the APR on the loan can give you a better idea of what you’ll pay for the loan overall.
Adding an authorized user to your credit card account is easy to do, and it can be a great way to help a friend or family member improve or establish credit. Plus it can even help you earn rewards.
When you add an authorized user to a credit card, you may be doing that person a huge favor, but there can be some negative outcomes, too. Here are some key things you should know before you take the leap.
Depending on your credit card issuer, it may not cost anything to add an authorized user to your credit card account. But note that adding an authorized user could come with an additional annual fee. Simply contact your issuer to add the new user’s information. Typically, that involves verifying a few details, like the authorized user’s date of birth and Social Insurance Number.
Your authorized user can have a separate credit card to use, but it’s up to you to decide if you want to give that person that much access to the account.
When you add an authorized user to your credit card account, information from the account can show up on that person’s credit reports. That means their credit can improve if the information is positive, simply as a result of being added to an account you keep in good standing.
For people with no credit or poor credit, or people who’ve had their applications for credit denied, becoming an authorized user can be one of the few ways to start building a better credit profile.
Bear in mind that not all issuers provide information about authorized users to the two major consumer credit bureaus – TransUnion and Equifax. So if your goal is to help a friend or family member improve their credit, ask your issuer whether they report authorized user account information to the two major consumer credit bureaus.
Your positive account information can help an authorized user build, or rebuild, credit. But if you make mistakes, or practice negative credit habits, you could potentially hurt that person’s credit too. If you miss credit card payments or rack up a big balance, both your and your authorized user’s credit can take a hit. Similarly, if the authorized user racks up charges on your card it could negatively impact your credit.
The access an authorized user has can vary by card issuer. For example, some issuers state that an authorized user can request account information, including copies of the billing statements. That means that person can see information about how you’re using the card, including when and where you’ve made purchases. Additionally, when an authorized user pulls their credit reports, that person may see similar account specifics, like how much you owe on the card and whether you’re current on your payments.
Adding authorized users on your account can make it easier to cash in on points or other rewards, but it can also mean taking a bigger financial risk.
At the end of the day, regardless of who makes the purchases, you and you alone will be responsible for paying the bill. For that reason, it’s important to choose an authorized user you trust to use your account responsibly.
Remember how intimidating it was to get your first credit card? Maybe it took you a while to learn how to use it responsibly and you made mistakes along the way. Adding someone you trust as an authorized user, maybe your child or another family member, could help that person get off to an easier start. An authorized user can learn good habits, with less risk, while starting to build (or rebuild) a positive credit history. Just remember that it’s a two-way street: An authorized user’s credit habits can impact your credit as well.
This method focuses on paying down your smallest debt balance before moving onto larger ones. The snowball method is all about building momentum as you pay off debt. It may be a good solution to better manage your finances over time.
But before you adopt this approach, here’s what you need to know about the debt snowball method.
The debt snowball method was originally made popular by personal finance expert Dave Ramsey. This debt-repayment method (which excludes your mortgage) focuses on paying off your smallest debt balances first while making minimum payments on all other debts.
Once a balance is paid off, you take the funds you had previously allocated to your smallest debt and put them toward the next-smallest balance, essentially building, or “snowballing,” your repayment toward the next balance. This cycle repeats until all of your debt is repaid.
Each balance payoff is a win. It’s a debt-repayment method that may not save you money on interest but could be a great motivator to keep paying off your debt.
The snowball method can be broken down into four simple steps.
Create a list of all of your debts, excluding your mortgage. Sort the debts in order from smallest to largest balance.
Each month, pay the minimum amount on each balance, except the smallest one — put as much cash as you can toward that one. You’ll want to review your budget and figure out how much money you can put toward your smallest balance without jeopardizing the rest of your finances.
After you’ve paid off the smallest balance, roll the extra money you were using for that balance into the monthly payment for the next-smallest balance. Of course, you have to continue making the minimum payments on all other debts.
Repeat this process until you’re debt-free.
The primary advantage of the snowball method is the psychological boost.
When you see debts disappearing, it can increase your motivation to continue paying off debt. And even if you’ve only paid off a small balance, your confidence in the progress you’re making grows.
This strategy may also help you get a better handle on your finances overall — and your stress. By allowing you to focus on one debt balance at a time, the snowball method eliminates worry about how to tackle all of your debt at once.
The biggest disadvantage of the snowball method is the potential for paying more money in interest over time than if you used another debt-repayment method. Since the debt snowball method focuses on the smallest debt balances rather than the balance with the highest interest, your costliest debt may get paid off last.
If you’re worried about wasting money on interest, take an inventory of your credit card APRs and loan interest rates. If you find that the snowball method may cost you too much money in the long run, this strategy may not be the best fit for your debt-repayment needs. Instead, consider the avalanche method — which focuses on paying your highest-interest balances first.
The debt snowball method is just one approach to becoming debt-free. If you’re ready to pay off your debt, the best thing you can do is sit down, identify the right debt-repayment strategy for you and make a plan.
Whether you need money to pay your rent or pay back a friend, you could be tempted to find it in the quickest and easiest way possible. And while a cash advance seems both quick and easy, it can also be expensive — so you should think carefully about whether you really need to spend the money and if a cash advance is the best option for you.
A cash advance is essentially using the available balance on your credit card to take out a short-term loan. Instead of borrowing money to buy a good or service with your credit card, you’re borrowing cash. Unfortunately, credit card companies don’t treat these two types of transactions the same.
If you buy a good or service with your credit card, the company will charge you the purchase interest rate stated in your contract, usually listed as the purchase APR. And if your card offers a grace period, you won’t start accruing interest on that purchase until your payment is due. That means that as long as your card has a grace period and you pay your balance in full and on time each month, you might never have to pay interest on your purchases.
Cash advances work a little differently though — grace periods typically don’t apply. You’ll start accruing interest on the advanced amount as soon as you take the money out, and your credit card company will likely charge you a higher interest rate for cash advances than it does for normal purchases, plus a processing fee.
If there’s one main takeaway from this article, it’s that a cash advance could end up really costing you if you’re not careful. To make an informed decision on whether to take out a cash advance, start by calculating the total potential cost.
Start by finding your credit card contract and locating the following information:
If you are carrying a prior balance, then taking out a cash advance can add further complications. A credit card issuer that is a federally regulated financial institution can decide how it will apply your payment to your balance. Your credit card issuer may apply your payment (above the minimum) to the card balance with the highest interest, which may be a cash advance. But they may also apply the payment proportionally to the entire balance. In either case, you’ll continue accruing interest on any remaining balance that you haven’t paid off. This could make it more difficult to pay off any debt already on your card when you took out the cash advance.
Check your credit card’s terms and conditionals, or call your issuer, if you want to confirm how your payments will be applied.
In addition to potentially spending more time in debt, taking out a cash advance can also increase your credit card utilization ratio (how much of your available credit you’re using) — which can hurt your credit.
Even though there are a lot of costs associated with a credit card cash advance, you may still want to consider one in certain situations.
If you’re traveling in a foreign country and you haven’t notified your bank of your travels, you could end up stranded without access to local currency. If it suspects fraudulent activity, your bank may put a hold on your checking or savings account, leaving you disconnected from your cash. Usually, you can clear this up with a simple phone call, but you might not have access to cell service or international calling, or you may have trouble connecting with a bank representative due to a time difference. As long as your credit card hasn’t also been blocked, you could use it to take out a cash advance.
Other instances when you might need cash that you just don’t have in the bank include hiring a plumber, landscaper, housekeeper, babysitter or small business that doesn’t accept credit cards. But remember, the interest can add up so try to make sure you only borrow what you can pay back.
You may also decide on a cash advance in other cash-only situations, say, if you’re short on rent and your landlord doesn’t accept credit cards.
There are lots of reasons you might need quick-and-easy access to cash, and luckily there are some alternatives to paying the high fees and interest associated with cash advances. If you don’t need the money immediately, you could try taking out a personal loan.
You could also borrow the money from friends or family, take on odd jobs to earn extra cash or even ask your creditor if it will give you some extra time to pay (working with a credit counselor may help). If the purchase you want to make isn’t essential, you could also wait to spend the money until you have it.
There might be times when you feel that taking out a cash advance from your credit card is the only option, but there are likely other ways to access the money you need. Before you take your credit card to the ATM, make sure you know exactly how much the cash advance will cost you, whether you have another option and whether this purchase or payment can wait. Then you can make an informed decision on whether a cash advance is the right option for you.
APR stands for “annual percentage rate” and is a yearly representation of the costs involved in borrowing money.
You can run into APRs in the terms of your mortgage, car and personal loans. When you take out one of these loans, the APR typically includes fees and other expenses associated with borrowing money. But the APRs you see on your credit card agreement can be a little different.
Your credit card’s interest rate and APR for purchases are one and the same. There are other APRs and fees associated with credit cards, such as annual fees or balance transfer fees, but those are not factored into the purchase APR. That’s because not every cardholder is going to incur fees.
When you’re shopping around for a new credit card, you may see APRs listed as fixed or variable. While many credit cards offer variable APRs, you may come across one that offers fixed.
There can be several types of APRs associated with any given card. It’s important to familiarize yourself with what they mean so that you understand what interest costs you could be charged with each card.
A credit card has different APRs, and each is decided using different factors. When an issuer approves you for a card, it offers you certain terms based on your creditworthiness, like the purchase APR. Your credit scores can be a key factor in how issuers determine the APR you qualify for. Typically, the higher your credit scores, the greater the chance you’ll qualify for a lower APR. Remember, a credit card’s purchase APR does not factor in additional fees, so read the fine print before deciding whether a card is right for you.
Working toward (or keeping) healthy credit is a good way to increase your chances of getting a favorable APR when you apply for a credit card. Better credit scores could help you qualify for a lower APR, which could save you money over the long term. If you know you will be applying for a credit card sometime soon, you may benefit by working to boost your overall credit health.
Need a lower interest rate on your credit card? Consider looking for a balance transfer card, which can help you obtain a lower interest rate on your credit card debt. That’s because balance transfer cards allow you to move credit card debt from one card to another, ideally at a better APR. Just watch out for any balance transfer fees associated with the transfer.
Knowing what’s behind an APR is important. It gives you a more complete picture of what you’ll be paying in interest, and it offers you another tool for effective comparison shopping.
As you’re comparing credit cards, pay special attention to the different APRs listed in the cards’ terms and conditions, and whether they’re variable or fixed.
And while APR is important, it’s not the whole picture. Make sure you’re comparing apples to apples and looking at any fees associated with the card. Consider the total package before applying for a credit card.
Read on to learn more about the rewards — and risks — of using automatic bill payment.
Automatic bill payments, once you set them up, allow you to transfer money from an account of yours — say a bank, credit union or credit card — to a creditor, service provider or other vendor at a preset date, without having to initiate the payment yourself every time a bill is due.
You can set up an automatic bill payment as a “push,” meaning you originate a payment from your bank or other financial institution to a service provider. But if you want a vendor to draw — or “pull” — money from your financial account for an agreed amount when a bill comes due, you’ll have to set up something called a pre-authorized payment.
Automatic payments can usually be set for whatever cadence a bill is due — weekly, monthly, quarterly or even annually — though it may be risky to set automatic bill payments too far in the future. More on that later.
As you can see, automatic bill payment can be helpful, but only if you’re organized and committed to monitoring your finances.
As long as your monthly expenses are consistently less than your income — for most of us that means a job that pays us more than we spend — automatic bill pay could work for you. But even if you’re confident about it, it’s best to start with one or two predictable bills that aren’t too large. Once you get used to that, you can try adding more bills until you find a system and level of automation that works for you.
Remember, automatic bill pay is not a license to totally check out on your finances. It’s just supposed to help you guard against missed payments and cut down on your worry and time spent on your finances.
It’s also important to remember that even with automatic payment set up and running smoothly, you should still check periodically for errors in your billing statements. Look for changes in prices and amounts billed, or unexpected one-time charges that can throw you off track.
It’s best to use automatic payment for bills that come due relatively frequently, say weekly or monthly, and for a predictable amount. With bills like your mortgage, cellphone or internet service, you know what to expect every billing cycle, and you can set up your payments accordingly.
Infrequent bills, like an annual subscription or semiannual vehicle insurance premium, may not be the best candidates for automatic bill payment, because you’re likely to forget about them. If one of those bills hits your account when your balance is low, you may end up overdrawing your bank account and getting hit with a fee.
Automatic payments for accounts with different amounts due each billing cycle are usually best handled with a “pull” — that is, by authorizing a vendor to debit your account for the amount due. But beware — if you don’t know in advance how much you’ll be billed, you could end up worrying about overdrawing your account or having to check ahead of time how much you owe, which would undermine the main advantages of automatic bill payment.
Credit card bills present challenges when it comes to automatic bill pay, because you’ll want to cover at least the minimum amount due, but you may or may not have enough money to pay more every month. One solution is to authorize a credit card to debit your bank account for the minimum amount due each billing cycle, and then make a manual payment for anything over the minimum you want to pay. This way, your automatic payment protects you from being charged any late fees or penalties, but you can still pay more than your minimum as your budget allows.
Most financial institutions offer online bill pay these days, and many of them will allow you to set up recurring automatic payments. It’s usually a matter of navigating your bank’s or credit union’s website to the bill pay area and then following prompts.
If you want to set up automatic bill pay, have recent bills from service providers and creditors handy. When prompted, enter the appropriate account numbers, addresses, dates and amounts you want to pay. Once you’ve entered the information, and followed the appropriate prompts, your financial institution will send the money to the service provider each billing cycle.
Keep in mind that when you set up automatic bill payment through a vendor — the “pull” method — you’re authorizing a company to deduct money from your financial account. So make sure you verify the identity of the company and understand how its automatic bill payment system works.
Automatic bill payments — once you take the time to set them up — can help you handle your bills with minimum effort and cut down the time you have to spend each month making sure you pay bills when due.
If you choose to use automatic bill pay, start with just a few bills to get used to the system, monitor your available cash to be sure it will cover your preset bill payments, and check your bills regularly for changes or mistakes.
Nobody likes feeling rejected, but there’s more to it than that.
Applying for a credit card usually results in the card issuer making a hard inquiry on your credit, which could lower your credit scores by a few points and stay on your credit reports for up to three years.
Of course, you want to be approved when you apply for a card. But what you don’t want is multiple applications resulting in too many hard inquiries clogging up your credit reports. So it’s important to understand your chances of being approved for a particular card before applying. That’s where Credit Karma Approval Odds can help.
When you’re logged into Credit Karma and searching for a new credit card, you might see notes about your approval odds near a card’s image.
Like the example shows, Approval Odds can include “Excellent,” “Very Good,” “Good,” “Fair” and “Poor.” But what, exactly, do they mean?
Approval Odds serve as guidelines regarding the likelihood you’ll be approved for a specific credit card. Everyone’s credit situation is different, so your odds might be different from those of other Credit Karma members.
Scroll over the Approval Odds tab, and you’ll see a pop-up message that explains how Credit Karma determines your unique Approval Odds.
“Credit Karma looks at how your credit profile compares to other Credit Karma members who were approved for this product. Of course, there’s no such thing as a sure thing, but knowing whether your Approval Odds are Excellent, Very Good, Good, Fair or Poor may help you narrow down your choices.”
If you’re looking for a new credit card, these Approval Odds can certainly help you when you’re evaluating which one is the best fit for you.
Even if your Approval Odds are “Excellent,” “Good” or “Very Good,” remember that the issuer — not Credit Karma — always has the final say in whether you’ll actually be approved.
Credit Karma compares your credit profile to the credit profiles of other members who were approved for the card to assess the likelihood that you’ll be approved too.
Though this determination is based on member data, it’s not a guarantee that you’ll be approved. Everyone’s credit situation is unique, so there’s simply no way to make a perfect comparison between our members’ profiles.
Some things a bank may take into account when deciding whether to approve your application include …
Because there are many factors involved, it’s not uncommon for a person to have “Very Good” Approval Odds and ultimately get denied.
We know it can be frustrating to get denied for a card after having “Good” Approval Odds on Credit Karma. You might think even it’s misleading or just plain wrong. That’s totally understandable — but you should know there’s more to it.
“While having this context can be extremely helpful to users, it’s not always 100% accurate because it’s an estimate, based on Credit Karma’s analysis, rather than coming directly from the credit card company,” says Roger Ma, CFP® and founder of LifeLaidOut.com.
Credit Karma is all about empowering people with accurate, transparent information — it’s baked into our mission.
Though Approval Odds use statistical analysis to determine the likelihood of approval, it’s important to understand some of the other factors at play.
First, there are several different credit score models out there. Credit Karma doesn’t actually calculate your credit scores — the scores and credit reports on our site come from TransUnion, one of the major consumer credit bureaus.
Credit Karma provides CreditVision Risk Score calculated directly by TransUnion. But a credit card company will likely use a different scoring model altogether.
There can be variation among credit scoring models and even among credit bureaus. Many different factors could be considered when calculating a score, and each model may weigh credit factors differently.
But though your scores may vary, they’re all based on information in your credit reports. So focusing on what’s in your reports can help you build better credit overall. These scores can help you figure out where you stand, but it’s ultimately the credit card company that will look at all your risk factors and determine if you’re a qualified candidate for its product.
If your application for a new credit card gets denied, don’t panic. Though the hard inquiry necessary for the application may affect your credit scores, getting denied doesn’t further hurt them. The impact on your credit may be small and can improve over time.
Secondly, check your credit reports to make sure all the information is correct. If not, you’ll want to dispute any errors.
On top of that, make sure your credit utilization — the amount of available credit you use — is below 35%. You’ll also want to verify your payments are on-time and paid in full to keep your credit in good shape.
If you really think the credit card company made a mistake in rejecting you, consider calling the company’s reconsideration line to make your case. There’s no guarantee this will work, but it can’t hurt to try.
While by no means the final say, Credit Karma Approval Odds should be used as a guideline for the types of credit cards that may be a good fit for you.
Ultimately, your best bet is to take care of your credit by making on-time payments and keeping your balances low. Building your credit is one of the best ways to increase the approval odds in your favor.
The best part about credit scores seems obvious. When it comes to interest rates, down payments and credit card terms, your good credit score can potentially save you money. What more do you need to know?
There are moments when this connection is less obvious though. When you’re shopping for the best deal on a mortgage or auto loan, the rules determining your credit score can seem like a hindrance. Many worry that shopping around for the best rates, a habit that is seemingly crucial to getting good terms, will adversely affect their credit scores. If a prime benefit of having a good credit score is potential savings, but shopping around for the best deal on a mortgage will hurt your credit score, then what’s the point?
Read on to dig in.
Yes and no. You probably know that each time you apply for a new line of credit you’re normally hit with a hard inquiry. Hard inquiries can negatively affect your score, so moving from lender to lender and piling up a bunch of these in a small period of time is probably not a great idea.
Still, depending on what type of credit you’re shopping around for and what model you’re getting your score from, the extent of the damage can vary. If you’re looking for an auto loan or mortgage specifically, some credit score models will allow for some level of shopping around by essentially viewing multiple inquiries within a certain time period as just one. Bureaus usually identify the fact that you’re comparison shopping by noticing the types of credit lines you’re applying for and the size of your requested loan, so it may be best to stay consistent. The time period over which you can rate shop under these models without feeling the effect of multiple inquiries can vary and is often from around 14 days to up to 45.
Beware that a single inquiry could still have a somewhat negative effect on your credit. Also keep in in mind that this rate shopping adjustment is only adopted by some credit score models and usually only applies to auto loans and mortgages. So if you’re applying for a dozen credit cards over a month or two, you’re likely to still incur a bunch of hard inquiries.
It’s great that many models will recognize when you’re shopping around, but there is a lot of variation between models so it’s good to have a backup plan.
Before having a bunch of institutions run your credit, do some research on your own. Consult the lender’s website to learn about the terms commonly offered to those with similar credit profiles. This way you can narrow down your choices before you start applying and your credit is run.
Another tip that could keep your credit score from dropping is to only apply for one type of credit account at a time. For example, if you’re in need of a mortgage, you may want to wait until later to get yourself a new car and the accompanying auto loan. Attempting to secure too much credit at one time may give lenders the impression that you’re desperate for cash or unprepared to handle your debts responsibly.
More generally, it’s best to go into the process with your credit health in great shape. Knowing that a few hard credit inquiries might dip your score a bit, prepare yourself by otherwise checking that your credit report is spick-and-span and ready for a little bit of a stress test. Monitor your credit and dispute any inaccuracies beforehand to help get you in the best position to get a great deal.
Too much hunting around for the best terms on a new line of credit could be harmful to your credit score. However, if you go about the process responsibly, you can achieve the benefits of comparison shopping without causing undue damage to your credit profile. All you have to do is be cautious and shop wisely.
Credit cards can be a useful tool to help you manage your finances and build your credit history. And depending on the credit card you can get, it may offer fraud and purchase protection, and unlike cash, if your card is lost or stolen, it can easily be replaced.
So, what’s the best way to use a credit card? We’ll explore four ways you can use your card: build credit, earn rewards, pay down debt and finance a purchase. We’ll also give you some tips for using your card so that you can help avoid racking up unnecessary debt or negatively impacting your credit.
If you’re new to using credit or want to improve a less-than-stellar credit history, getting a credit card may be a good first step for you. There are two types of cards you can apply for: secured and unsecured.
Secured cards require a deposit, which is often refundable, that’s usually equal to your credit limit and will be used as collateral. Unsecured cards don’t require collateral and are granted based on your creditworthiness. Secured credit cards often have less-stringent application requirements than unsecured cards.
Payment history for both types of cards is typically reported to the two major consumer credit bureaus. Making your payments on time and in full can help you establish a pattern of responsible borrowing and can help you boost your credit, whereas late payments can negatively impact your credit.
Credit cards can be a great way to earn rewards or cash back on purchases you’d be making anyway. There are a variety of rewards cards to choose from, including travel, hotel, airline and cash back cards, to name a few. The type of card that’s right for you will depend on the kind of rewards you want to earn, your lifestyle and your spending habits.
A word of caution if you opt for a rewards or cash back credit card: You may be tempted to spend more than if you were to pay for items in cash. So if you’re going to use a credit card to earn rewards, you should try to only use your card to pay for items you’d normally buy anyway and that you know you can pay off.
Also, many rewards cards have an annual fee. If you won’t earn enough rewards to offset the fee, it probably makes sense to opt for a different type of card.
Using a credit card for purchases may seem counterintuitive, since it’s one of the ways people can accumulate debt. But when used strategically — like to take advantage of an introductory 0% APR for balance transfer offers — a credit card can actually help you pay off debt.
Many credit cards offer balance transfers with low or no interest for an introductory period. If you transfer high-interest debt and pay it off before the promotional period ends, you could save yourself a bundle on interest charges.
If you use a credit card to reduce debt, we don’t recommend making any additional purchases with that card until you pay off the balance in full. Also, watch out for fees. Some credit card issuers charge a balance transfer fee when you transfer your balance from a different card. If possible, try to find a card that offers an intro balance transfer fee.
For the most part, a credit card isn’t your best bet for financing a purchase, since interest rates are typically high. But a card with an introductory 0% purchase APR can give you an opportunity to pay off a big purchase interest-free. If you’re confident you can pay off the balance in full and before the intro rate ends, using a credit card to finance a purchase may be a good option for you.
Just be sure to carefully read the fine print of any credit card you use.
While a credit card can provide numerous benefits when used strategically, it can also lead to high interest charges, increasing debt and a negative impact on your credit if you’re not careful with how you use it. Here are a few best practices to help you keep your budget and financial health on track.
There are many benefits to keeping a credit card in your wallet, but there are some risks, too. When used strategically, credit cards can help you establish a solid credit history, earn rewards on everyday purchases, pay off high-interest debt or obtain interest-free financing. The trick to using these benefits while maintaining healthy credit card use is to use them to pay for items you’d buy anyway, pay your bill in full and on time every month, and keep your credit utilization rate low.
Let’s face it: Making payments to multiple lenders each month can be a hassle. It can also be expensive — especially if some of your debts have a high interest rate. Taking out a personal loan to consolidate debt can sometimes make debt repayment easier and cheaper.
That’s because a consolidated loan may have a lower interest rate than the combined rates on the individual loans you owed.
You can consolidate all different kinds of debt using a personal loan. But first, you’ll want to figure out if it’s your best option.
Personal loans can come from banks, credit unions or online lenders.
You can use the money for a wide range of purposes for nearly anything you’d like, including repaying existing debt. Your interest rate will be based on your credit scores, income and other financial details.
You’ll know your repayment timeline upfront, and many lenders have repayment periods from six to 60 months. Many personal loans are unsecured, which means there is no collateral guaranteeing the loan.
Balance transfer cards sometimes have a limited-time 0% promotional interest rate that allows you to pay no interest for a few billing cycles. You may have to pay a small fee to transfer the balance, although some cards do not charge for this.
Creditors determine the amount you can transfer to a balance transfer card based on your credit line and the creditor’s policies. Just be aware that interest rates can be high when the promotional rate expires.
If you’re a homeowner with equity in your home, you could borrow against the house and consolidate your debt using a home equity loan.
Interest rates are generally lower on a home equity loan than on a personal loan, but you must use your property as collateral to secure the loan. This means if you can’t pay back your loan, you could lose your home.
There are several benefits to using a personal loan to consolidate debt.
Personal loans can have lower rates than other kinds of debt. If you can qualify for a low-interest personal loan and reduce your rate, you’ll save yourself money on loan repayment.
Sometimes when you borrow money, your interest rate is variable. This means it’s linked to a financial index, such as the prime rate. If the index rate goes up, your rate typically goes up too.
If you’re tired of owing money at variable rates, you could get a fixed-rate consolidation loan so you’ll know exactly what your monthly payment will be each month.
However, keep in mind that rates can go up for personal loans with teaser rates. Make sure you find out the maximum rate you could be charged for your consolidation loan.
When you take out a personal loan, you agree to repay that loan on a set schedule specified in your loan agreement. Since you’ll have your loan term going in, you’ll know exactly when you’ll become debt-free if you pay on time.
Be aware that if you want to pay off your loan early, your lender may charge a prepayment penalty.
Your credit scores are based on a number of different factors, each with a different weight. For instance, if you’re unable to pay your credit cards on time, that can negatively affect your payment history — an important factor.
If you’ve maxed out your cards, that can hurt your credit utilization rate. Credit utilization measures the amount of your available credit you use. A lower utilization rate could help your credit scores.
Consolidating your debt with a personal loan could help your credit scores if it leads to a lower credit utilization rate and more on-time payments.
There are some potential disadvantages to consider before you decide to use a personal loan to consolidate your debt.
There’s no guarantee a personal loan will definitely have a lower interest rate than all the debt you pay off. If you consolidate any debt with a lower interest rate, you’ll raise the costs of repaying it. Use a debt repayment calculator to compare any potential savings.
Even if you lower your interest rate, there’s a chance your personal loan could cost you more if you stretch out your repayment period for too long.
If you use a personal loan with a five-year repayment term when you’d otherwise have repaid the debt in two years, you’ll pay interest for three years longer. This could mean you’ll pay more interest over time, depending on your loan’s interest rate.
For example, say you owe $2,000 on a credit card with 13% interest and are paying $75 a month and also owe $5,000 on a personal loan with 10% interest and are paying $250 a month.
If you refinanced to a personal loan at 8.99% interest for 36 months, you would lower your interest rate but would pay $145 more in interest than if you hadn’t consolidated.
Sometimes you have to pay to take out a personal loan. Depending upon your lender, you could end up owing application fees, origination fees or prepayment penalties if you pay off your loan early.
These fees sometimes make consolidating your debt more costly than just continuing to pay back your current lenders.
Some personal loans are secured personal loans. With a secured loan, certain assets will act as collateral to guarantee the loan.
Lenders could take the assets if you don’t repay as promised. If you take out a secured personal loan to consolidate debt that was unsecured — meaning the debt didn’t have any assets guaranteeing it — you’ve put the collateral at risk.
If you don’t pay back your loan, you could lose the property you put on the line.
When you pay off credit cards using the proceeds of a personal loan, you free up your line of credit. If you use these cards again and can’t pay off the balance, you could end up owing your original creditors again.
But now you’d have to pay off your consolidation loan and a bunch of new debt, leaving you in worse shape.
Consolidating debt with a personal loan can be a good idea if you can get a new loan with favorable terms and a lower interest rate than current debt. Whether you can qualify for a consolidation loan depends on your credit scores, income and other financial factors.
If you qualify, make sure you understand the loan terms, have a plan to pay it back and get your spending under control so you don’t end up deeper in debt. If the conditions are right, a debt consolidation loan can be a good tool to help you become debt free faster.
Your statement balance is a snapshot of all the expenses and payments that were made to your account during one billing cycle. Once your statement balance is generated, it will not change until your next billing cycle closes — but that doesn’t mean your credit card balance won’t change.
That’s because your current balance reflects the current total of all charges and payments to your account — and that changes every time a transaction occurs. So if you’ve made a few purchases since your statement closing date (the date that one billing cycle closes and after which the next begins), then your current balance will be higher than your statement balance. On the other hand, if you’ve made a payment since your statement closing date and no other transactions have occurred, then your current balance will likely be lower than your statement balance.
Paying your statement balance in full before or by its due date can help you save money on interest charges. And paying your current balance in full by its deadline can improve your credit utilization ratio and your credit health.
Generally, as long as you consistently pay off your statement balance in full by its due date each billing cycle, you’ll avoid having to pay interest charges on your credit card bill. This is why you should strive to pay off each billing cycle’s statement balance by the due date whenever possible.
But life happens. If you can’t afford to pay off your entire credit card statement balance by the due date, make at least your minimum payment. This will cause you to accrue interest, but making at least your minimum payment on time will help you avoid late fees and negative marks on your credit reports.
Credit card issuers aren’t required to offer grace periods, but if an issuer chooses to, it must give customers a grace period of at least 21 days from mailing or delivering a customer’s statement to allow them to pay off the statement balance listed with no added interest charges.
Credit card issuers typically offer a grace period of at least 21 days from mailing or delivering a customer’s statement to allow them to pay off the statement balance listed with no added interest charges.
The advent of online billing and payment options has made it possible for many credit card issuers to offer automatic payments to their customers.
Check with your credit card issuer to see if autopay is available. If so, there’s a good chance that you’ll be able to select “statement balance” as your automatic payment choice.
Autopay could help you stay on top of your bills and avoid late payments and interest charges on your purchases. It’s also a good idea to set a reminder on your calendar a few days before your payment date to make sure there are enough funds in your bank account to process the payment.
Some transactions, like cash advances, do not fall under the same “grace period” rules that typically apply to purchases. Instead, they begin accruing interest the moment you take one out.
So if you’ve recently taken out a cash advance on your credit card, we suggest paying it off as soon as possible, regardless of whether you’ve received your statement yet.
Depending on how your credit card issuer reports your account balances to the consumer credit bureaus, your current balance could affect your credit utilization ratio.
Your credit utilization rate is simply how much of your available credit you’re using at any given time. We have a great guide on credit utilization and how it can affect your credit scores. But for the purpose of this article, suffice it to say that the lower your credit utilization rate, the better.
Credit bureaus calculate credit utilization rates off the balances that they receive from credit card issuers. Many issuers report their cardholders’ statement balances, but some may send current balances instead.
If you’re worried about this, check with your credit card issuer to find out which balance it reports to the credit bureaus. If your issuer happens to report current balances instead of statement balances, ask which day of the month that it reports.
If you’re ever worried about your credit utilization rate being too high, aim to pay down your current balance whenever possible. A good goal is a current balance below 35% or below your total credit limit.
When it comes to the question of whether you should pay your credit card statement balance or current balance each month, it really boils down to personal preference and financial goals.
If you choose to pay off your statement balance by the due date each month, that’s a great choice. And if you choose to pay off your total current balance by the due date each month, that’s a great choice, too!
With either choice, you’ll avoid the interest charges that come with only making minimum payments on your credit card purchases. Plus, you’ll drive down your credit utilization ratio, which may help your credit health. The fact that you’re asking the question at all is great news, because it shows that you’re someone who takes credit seriously.
Whether you are just three days late or 30 days late, not paying your bills on time could affect you for months and potentially years to come.
Banks and issuers consider payment history when evaluating your credit risk and deciding whether or not to approve you for credit. A long-standing history of on-time payments suggests that you’re a reliable borrower; a poor history of on-time payments suggests that you may not repay debts and could result in a costly loss to the bank or issuer.
Being unreliable with payments is a red flag to financial institutions, and several things can occur when you pay late.
Paying late is a dangerous credit habit that could lead to more damaging credit actions, such as neglecting an account until it becomes delinquent or sent to collections. An account in collections may remain on your credit report for six to seven years and cause even more damage than a late payment.
If your bills are past due, the sooner you can pay the bill, the better. The damaging effect of a late payment on your credit scores can increase the longer the delinquency.
If you’ve made a late payment recently, you could attempt to do the following:
Finally, keep track of your overall credit health by checking your free credit reports on Credit Karma. We break down the factors that can affect your scores, so you can keep an eye on your payment history along with other important areas. Paying on time every month could help you build good credit history and improve your credit scores over time.
Payment history is a key component of your credit scores and missing even one payment could have an impact. Fortunately, it doesn’t take too much effort to manage once you know what to look out for.
So what, exactly, do you need to know about paying your monthly bill? Here’s a brief overview that can help you get — and stay — on top of your payments.
Understandably, life can get busy and it can be challenging to keep up with your payment due dates. So how can you make sure you don’t miss a payment?
Many people believe that you need to carry over a balance from month to month on your cards in order to build credit, but that’s just a myth.
What actually helps build credit is regularly paying your credit card bill on time. In fact, if you carry a balance, you may end up having to pay hefty amounts of interest with no benefits to your credit whatsoever.
We recommend avoiding carrying a balance whenever possible. In the case that you’re unable to pay off your balance in full, ensure you make at least the minimum payment.
If your credit card balances are starting to build up and you’re getting caught up in interest payments, you may want to consider a balance transfer card, especially one that offers a 0 percent introductory APR period.
Aim to pay your credit card bill in full by your statement due date. Paying the full statement balance each month has a positive impact on your credit and shows lenders that you’re able to responsibly borrow money.
If your credit utilization (the total amount of credit you’re currently using divided by the total amount of credit you have available) is on the higher end, you might consider making multiple payments each month, as this can reduce your credit utilization rate. It’s generally recommended to keep your overall credit utilization below 30 percent.
Your credit card issuer will typically report your credit activity to the credit bureaus on a monthly basis. So, if you pay off a portion — or even all — of your credit card bill before that date, you can lower your credit utilization, which can in turn benefit your credit.
For example, say you’ve charged $2,000 in purchases and you have a $4,000 credit limit. When your statement date comes around, your card issuer will report your credit utilization at 50 percent.
But suppose you decide to pay off $1,000 before your statement comes through. That will lower your card balance to $1,000. When your statement is issued, your credit utilization will only be reported as 25 percent in this instance.
To find out exactly when your information is getting reported to the credit bureaus, call up your card provider.
Paying off credit card bills — or any bills, for that matter — is never much fun, but maintaining good payment habits can go a long way for your credit.
Remember: Try your best not to miss a payment, avoid carrying a balance to save on interest, and either automate your payments or keep track of when they’re due.
Credit card utilization — or just credit utilization, for short — refers to how much of your available credit you use at any given time.
You can figure out your credit utilization rate by dividing your total credit card balances by your total credit card limits. The resulting percentage is a component used by most of the credit scoring models because it’s often correlated with lending risk.
Most experts recommend keeping your overall credit card utilization below 35%. Lower credit utilization rates suggest to creditors that you can use credit positively without relying too heavily on it, so a low credit utilization rate may be correlated with higher credit scores.
Now that we’ve defined our terms, let’s look more closely at how your credit utilization relates to your credit scores.
As we mentioned above, your credit utilization rate is an important indicator of lending risk. In the eyes of most lenders, a person who constantly charges all the money they can — hitting or going over their credit limit on a regular basis — is more likely to have difficulty repaying that money.
Conversely, someone who charges smaller amounts may be more likely to be able to pay off their balance in full each month, and thus represents a lower risk to the lender.
There are different credit scoring models, so it’s difficult to calculate exactly how credit utilization will impact your credit scores.
With that said, there’s a strong correlation between a consumer’s credit card utilization rate and their credit scores. Though individual cases may vary, those who keep their utilization percentage low generally have higher scores than those who habitually max out their credit cards.
If you don’t want your credit utilization to negatively impact your credit scores, it’s important to consider your spending habits. Factors such as your credit history and the number of cards in your wallet matter, too.
High utilization on a single credit card could especially hurt your credit scores if you have a short credit history and only one card. On the other hand, you may feel the effects less if you have a long and excellent credit history and spread your utilization across multiple cards.
Although it’s an important factor in calculating your credit scores, try not to focus just on this one aspect. Keep the big picture in mind.
Here are three tips that may help you lower your credit utilization.
You don’t have to carry a credit card balance or pay interest every month to show credit card utilization. Even if you pay your credit card balances in full every month, simply using your card is enough to show activity.
While experts recommend keeping your credit card utilization below 35%, it’s important to note that creditors also care about the total dollar amount of your available credit. This means that if you have a low credit limit, it’s not necessarily a huge deal if your credit card utilization rate is slightly higher than recommended.
With the debt avalanche method, you pay as much as possible toward your highest-interest debt, while making minimum payments on the rest, until all your debt is paid off. If your high-interest debt is weighing you down, this could be a good solution to becoming debt-free.
The avalanche method prioritizes paying off your debt balances with the highest interest rate or APR. You begin by paying your highest-interest-debt balance first. Once you eliminate that balance, you take the funds you’d been using for those payments and put them toward your next-highest-interest balance, all while making the minimum payments on the rest of your debt.
The idea is to repeat this process until all of your debt is paid off. This method helps you save money by getting rid of the costliest debt first.
Before you begin, review your budget to figure out how much cash you can put toward your debt.
Once you know how much money you can budget to pay off debt, make a list of all of your balances. List them in order of highest to lowest interest rates. Be sure to note the current minimum payment required for each balance.
Next, make all minimum payments on your balances and put any leftover money toward the balance with the highest interest rate. After the balance with the highest interest rate has been completely paid off, move on to the next-highest-interest-rate balance — again, putting as much money as you can toward it. For example, let’s say you currently have the following four debt balances:
Since the credit card with the $1,000 balance has the highest APR, you’ll want to start there when following the debt avalanche method.
After you’ve paid off the $1,000 balance, move on to the balance with the next-highest interest rate — the $2,400 credit card balance. You’d continue this pattern until you’re debt-free.
The debt avalanche method can help you save money on interest. If you have large debt balances with high interest, this could be a great strategy to help you save the most money.
Logically, it would make the most sense to select a debt-repayment strategy that would save you the most money. But sometimes paying off debt isn’t just about the math. There are psychological factors that may play a role in the success of any debt-repayment method.
According to the Association for Consumer Research, some people have more success if they focus on smaller debt balances.
Every time a debt balance has been paid off, you feel a sense of accomplishment and pride. This can help motivate you to stick to your debt-repayment strategy. Repaying small balances fuels the commitment to keep up the good work. If you’re someone who is motivated by little wins, this approach — known as the “debt snowball” — may be a better debt-repayment approach for you.
Creditors use credit scores as a tool to assess your credit risk — i.e., whether you’re likely to pay credit issuers back if they give you money.
According to FICO, one of the major credit-scoring modelers, your FICO® credit scores are made up of five factors.
Let’s consider that last category, credit mix. The amount and types of credit you have help determine this factor.
So what are the different types of credit? And what implications can each type of credit have on your credit scores? We’ll help you figure it out.
There are three types of credit accounts: revolving, installment and open.
While it’s good to have a mix of different types of credit accounts, your credit mix likely won’t be the most important factor in determining your scores.
But having a mix of credit account types and paying them off as agreed can help show lenders that you’re reliable. Lenders may view you as less of a credit risk because you’re demonstrating an ability to successfully manage different types of credit and the payment systems associated with them.
This means that if you can open and maintain different kinds of credit — say, an installment loan like an auto loan and a revolving line of credit like a credit card — it may be able to help you build your credit scores.
It’s important to note that you should only apply for additional credit accounts if you plan on using the credit, not just to pad your credit reports.
Maintaining good credit scores or building toward them isn’t just about credit mix; it’s also about managing your other credit-scoring factors, especially credit utilization ratio.
Installment loans are fairly easy to understand and manage. You generally make the same payment once a month, every month, until the loan is paid off. But revolving credit is a different beast — to a certain extent, you get to determine how much you want to borrow and pay off each month as long as you make the minimum payment. And though you have the option to pay only the minimum, it typically means you’ll end up paying interest on the unpaid amount. This allows many people to get into credit card debt traps, where their balance (the amount of money owed to the credit card company) gradually grows over time.
Increasing the amount owed to a credit issuer bumps up a user’s credit utilization ratio, the total amount of credit card debt owed compared to the total amount of available credit at a given time. The credit utilization ratio likely affects credit scores even more than credit mix. This one factor dictates about 30% of your FICO® credit score — way more than your credit mix alone.
That’s why it’s especially important to keep an eye on your revolving credit accounts. By paying off your credit card bills on time each month (another important credit-scoring factor) and keeping your credit card balances low, you can keep your credit utilization down and help your credit scores even more. Plus if you pay your balance on time and in full each month, you likely won’t have to pay any interest.
Keeping your debt levels low (especially credit card debt) and paying off your accounts on time are important steps you can take to help your credit scores.
Having a healthy mix of credit, such as revolving and installment credit, can also help your credit scores. Staying on top of your payments regardless of credit type can help show lenders that you can handle various types of credit.
But remember, if you don’t absolutely need to open a new type of credit account, it’s probably not worth it — just focus on maintaining good spending and paying habits on whatever existing credit you have. Your scores can still benefit from that.
The 50/30/20 rule budget only requires you to track and divide your expenses into three main categories: needs, wants, and savings or debt. This reduces the amount of time you have to spend detailing your finances and allows you to focus more on the big picture instead.
To figure out the dollar amount for each category, you’ll need to first calculate your after-tax income. To do this, simply start with your take-home pay on your paycheck and add back any deductions that aren’t taxes. These items may include things like health insurance and retirement contributions.
Once you’ve figured out your after-tax income, you’ll use 50% of that number for your needs spending, 30% for your wants spending, and 20% for debt or savings expenditures.
The first thing you must do is calculate how much money you can allocate to your needs, wants, and savings or debt. Let’s say you’ve calculated your after-tax income as $6,000 per month. In this case, you’d have $3,000 for needs, $1,800 for wants, and $1,200 for savings and debt.
Now that you know how much you can spend in each category using the 50/30/20 rule budget, the question is which expenses go in each category. You’ll have to use a bit of discretion in determining what fits into each category, but here are some general guidelines to follow.
Needs are expenses that you absolutely must keep in your budget no matter what. These include things like housing, utilities, transportation and healthcare expenses; at least the minimum payments on your debts; and the bare minimum of basic clothing and supplies for living.
Wants are expenses that you choose to spend your money on but that you don’t need to live your life. This category includes expenses like dining out, alcohol, cable TV, internet, shopping trips, vacations, memberships, subscriptions, gifts, entertainment and other luxuries.
It’s easy to confuse many wants as needs. A simple way to determine if something is a need or a want is to ask if you could live without it. If you could, it’s a want, not a need.
Finally, the savings or debt category is money you set aside for your future or to pay off debt faster than required. You can use this money to build an emergency fund, save for a down payment on a home, invest for retirement or pay off your student loan debt or credit card more quickly than required.
If you want to save money more quickly, you’ll need to set aside some of your wants money for extra savings.
Overall, the 50/30/20 rule can be a sound budgeting method for some people. But whether the system is right for you depends on your specific circumstances.
Having just three categories to track might help you focus on fine-tuning your finances instead of getting bogged down in the process of categorizing each individual expense. For others, the lack of structure could make it harder to find ways to improve their spending habits. Ultimately, you need to decide whether a budgeting system that’s less detailed or more highly detailed will be best for you.
Another potential issue with the 50/30/20 rule budget is the breakdown of money allocated to needs, wants, and savings or debt. Depending on your income and where you live, 50% may not be a large enough percentage to cover your needs.
For instance, people who live in areas with a high cost of living may have to put a large part of their income toward housing, making it almost impossible for them to keep their needs under 50% of after-tax pay.
Finally, some critics of the plan say the 50/30/20 rule budget doesn’t work well for higher-income earners, because it calls for too much spending on wants versus needs or savings and debt.
For people who don’t like detailed budgeting, the 50/30/20 rule budget is a simple approach to keeping their finances in check. With only three major categories to track, you don’t have to dig into the nitty-gritty as much as you would with a normal budget.
Unfortunately, the 50/30/20 rule won’t work for everyone because of individual circumstances, such as residing in an area where the cost of living is high. Keep in mind, though, that you can adjust the rule for your particular needs by changing the percentages to match your personal situation and financial goals. If that doesn’t work, there are plenty of other budgets you can try, too.
Although this might seem surprising, a key driver of people’s ability to save comes from an inability to go out. Nearly half (47%) of respondents who’ve been saving more during the pandemic say it’s because they’re not spending money to go out.
We’ve talked about how the fear of missing out, or FOMO, led young adults in Canada to go into debt to keep up with friends. While the pandemic may be changing this behavior in the short term, our survey indicated that it also may be changing the way some Canadians will think about FOMO-related spending in the future. Almost half of those surveyed (45%) say they’ll feel more able to keep up with friends without overspending within the next year. (Learn more about our methodology.)
In addition to potentially feeling less social pressure to spend after the pandemic is over, some survey respondents say they’ve developed healthy financial habits — like monitoring their finances more closely and setting up a monthly budget — that they plan to continue after the pandemic. We’ve got some tips to help you get your finances in shape and avoid FOMO-related spending.
|One third (33%) of respondents are saving more during the pandemic than before COVID-19. The primary reason cited for more saving is not going out (47%).|
|Almost one-third (32%) of respondents think they’ll save more post-pandemic compared with pre-COVID-19, and nearly half of respondents (45%) say that within the next year they’ll be able to keep up with their friends without spending money they don’t have.|
|Canadians from our survey said they’re most likely to cut back on social activities with large groups — including concerts (41%), travel (40%) and weddings (38%) — once the pandemic is over.|
|The pandemic has led to some to cultivate healthy financial habits that Canadians want to keep post-pandemic, such as cutting back on daily spending (35%), keeping track of their finances more closely (32%) and maintaining a monthly budget (26%).|
The coronavirus is leading some Canadians to adjust their finances and save more, our survey found. Almost one-third (32%) of those surveyed think they’ll be saving at least a little more after the pandemic.
Here’s what people surveyed plan to spend less on post-coronavirus:
The pandemic has had a positive effect on some Canadians’ finances, according to our survey. For instance, 45% of surveyed consumers think they will be prepared to keep up with friends without spending money they don’t have. And almost a quarter of respondents (24%) say they’re at least a little more comfortable talking about their finances now with friends and family than they were before the pandemic.
Here are the top three positive financial habits that Canadians most want to continue once the pandemic is over, based on our survey:
Still, the pandemic may have affected different generations’ attitudes toward their finances in distinct ways. For example:
If you’re among the 34% of Canadians we surveyed who said they’ve experienced feeling pressure to spend money they don’t have to keep up with friends, changing social norms as a result of COVID-19 may give you an opportunity to work on avoiding FOMO-related spending post-pandemic.
On behalf of Credit Karma, Qualtrics conducted a nationally representative online survey in June 2020 among 1,017 Canadian adults to better understand how their spending habits have changed during the coronavirus pandemic.
The spread of COVID-19 and its repercussions could affect a number of areas in people’s financial lives. We’ve broken down our advice and resources into a few key areas to help Canadians better deal with this crisis:
We’ll be updating this page as the situation develops, so check back regularly.
4 financial tips to help you weather the coronavirus crisis — When we come out on the other side of this outbreak — and we will — you’ll want your finances to be in the best possible place they can be. You can take action now by managing your cash flow, keeping an eye on your credit and knowing your options. Note: Credit Karma’s Canada team produced this article as a resource for members. It was not written by our editorial team. Our editors are including it here because we think it’s helpful.
When should I pay my credit cards? — We know you may be juggling a number of payments. As you evaluate which of those payments to prioritize, it’s important to understand how credit card interest works and what happens if you don’t pay off your full statement balance by the due date.
How late payments can affect your credit — You may be wondering what happens to your credit when you’re late on a payment. In this article, we’ll explain how that works and what to do in that situation.
How do accounts in collection affect your credit — If you can’t make your loan payments on time, your lender may take steps to recover its losses. The good news is that there are actions you can take if you’re having trouble making payments, including reaching out to your lender to ask about temporarily suspending your payments, extending the term of your loan or reducing your interest rate.
What 5 main factors determine your credit scores? — How are your credit scores decided? The main factors that affect your credit scores include your payment history, variety of credit types, credit utilization, length of credit history and credit inquiries.
Why did my credit scores drop? — There are many things that can lower your credit scores. Some things, like missing a payment, shouldn’t come as a shock, but others, like closing an account, may be surprising.
What’s the difference between a hard inquiry and a soft inquiry? — Before applying for or checking your credit, it’s important to find out whether it will be recorded as a hard inquiry or soft inquiry, as a hard inquiry could lower your credit scores.
Note: Credit Karma’s Canada team produced this article as a resource for members. It was not written by our editorial team.
Here are some steps to consider taking that may help you feel more confident and stay on top of your credit while so much else is going on.
Pausing or minimizing certain bill payments if you can — and determining which expenses are essential — can help you manage your cash flow.
For example, paying less rent for a month or two and making it up later in the year could help you shuffle around your finances now to help you make ends meet.
Think of everything you’re paying for on a monthly basis. You may be able to temporarily stop making payments toward student loans, auto loans and insurance. Asking for a break from payments may help you find some breathing space. But it’s important to remember that although you won’t be making payments, interest may still apply during any breaks you arrange. And you’ll need to make arrangements to resume paying at some agreed point in the future.
Make a note of the different payment breaks you’ve agreed to with your lenders. And during each break, prepare to start paying again, because missing payments after any payment break ends can hurt your credit score.
You could even set up a direct debit to start the month after your payment break ends, to make certain you immediately get back on track with your payments.
If possible, make sure you’re making your minimum payments on accounts where you can’t get deferrals. While it’s normally a best practice to pay off your credit card bill in full each month, during times of stretched income, try to pay the minimum payment to help you avoid late fees or hits to your credit score.
If you know you’ll need to spend more than you currently have on necessary expenses, pay attention to the interest rate on your credit cards and take stock of your options.
Your interest rate might be found on letters or emails you received when you were approved. You should also be able to find that information by logging into your online account through the lender’s website or app, or by giving them a call.
The goal here should be to think about how you might be able to move more expensive debt with higher interest rates to more-affordable options that offer lower interest rates.
Paying a lower interest rate on debt with other credit cards or personal loans with lower rates could save you a significant amount of money over time. But remember, you always need to check whether your current lender allows you to transfer your balance to a different lender and whether any fees apply from the existing lender or the new one.
Arm yourself with knowledge. Use both public and private resources and talk to your lender to determine the best option for your situation.
The government of Canada and provincial governments are taking action to help Canadians deal with the financial hardships of the ongoing pandemic, including income support, tax filing flexibility, expanded employment insurance and other programs. Additionally, Canada’s six largest banks and other financial institutions have announced that they’ll be offering Canadians financial support on various loans and credit products.
When we come out on the other side of this outbreak — and we will — you’ll want your credit score to be in the best place it can be.
Part of the battle is protecting your score through this difficult period, doing all you can to ensure you don’t miss payments or apply for too many new products in a short space of time.
Remember, you can always check your credit on the Credit Karma website and in the app. We’ve got you covered with seeing your TransUnion credit report — check in whenever you need to.
Take some time to figure out which steps are realistic for you right now, given everything that’s going on. It’s not worth over-stretching yourself, but there could be some little wins in there to keep you ticking over.
Even though most Canadians are optimistic about meeting their 2020 resolutions, it’s no secret that New Year’s Resolutions are tough to keep. Our latest research suggests this could be because setting and keeping resolutions is often too expensive.
Three-fourths of Canadians we surveyed (75%) say their New Year’s resolutions will cost them money this year. (Learn more about our methodology.)
And, cost has kept almost two-thirds of Canadians we surveyed (62%) from achieving a past New Year’s resolution. We’ve got some tips to help you make meaningful changes while keeping your budget in mind.
|Survey respondents’ top two 2020 resolutions are saving more money (70%) and eating more healthfully (60%); 67% feel confident that they’ll meet their resolutions.|
|Three-fourths of respondents (75%) say their 2020 resolutions will cost them money.|
|Nearly two-thirds (62%) say cost has kept them from meeting a past New Year’s resolution.|
|Almost two-in-five (38%) of respondents weren’t able to meet a New Year’s resolution in 2019.|
When it comes to 2020, Canadians have made a number of resolutions. According to survey respondents, here are the top five.
Many respondents (67%) are confident that they’ll meet their resolutions.
Our research shows that cost may be a major factor in keeping resolutions past and present. Nearly two-thirds (62%) of those surveyed cited cost as a reason they’ve been unsuccessful with a resolution sometime in the past.
This year, 75% of respondents say their resolutions will cost them money. And for half of those who plan to spend money on their resolutions, the cost will be in the thousands. Here’s a look at how much people intend to spend on resolutions in 2020.
If you’ve had some trouble meeting your resolutions in the past, the great thing is you can always try again — 2020 is a new year, and these tips could help you achieve more success this time around.
On behalf of Credit Karma, Qualtrics conducted a nationally representative online survey in December 2019 among 1,019 Canadian adults to better understand how they make and keep New Year’s resolutions.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors' opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when it’s posted.
What’s more, of those who went into debt over the holidays last year, 28% are still trying to pay it off. Here are some other key takeaways from our survey looking at holiday spending by Canadian millennials.
The good news is you don’t have to be haunted by the ghosts of holiday debt when the new year rolls around. Planning ahead, looking for deals and getting crafty can help keep your life merry and bright even after the holiday buzz wears off.
|Nearly 2 in 5 (36%) Canadian millennials expect to go into debt this holiday season. Almost 2 in 5 (38%) people in that group expects that debt to total more than $500.|
|Almost half (45%) of Canadian millennials feel debt is unavoidable during the holidays.|
|More than a quarter of Canada’s millennials (28%) who went into debt last year are still paying that debt off almost a year later.|
|Over half (51%) of Canadian millennials said they would skip holiday gift giving if they could.|
|More than 1 in 10 Canadian millennials (14%) plan to take out a loan for the holidays. Of them, 79% plan to keep it a secret from friends and family.|
|Most Canadian millennials who plan to go into holiday debt said they’ll likely go into debt to buy gifts for their immediate family or children (66%). Meanwhile, 27% think they’ll go into debt due to holiday travel and 22% think they’ll go into debt because of holiday meals.|
|Almost half of millennials in Canada (48%) feel immense personal stress leading up to and through the holidays. More than one quarter (27%) would rather pay down existing debt instead of holiday gift giving, while 22% wish they could use gift money to save for a home or car.|
See our key findings infographic
Given the pressure millennials can feel to keep up with their peers, it’s no wonder nearly half of Canada’s millennials from our survey (45%) said they think holiday debt is unavoidable.
But just how much debt are millennials planning to take on this season? Most will pile up a few hundred dollars of debt over the holidays, our survey found — with nearly 2 in 5 (38%) planning to go more than $500 into debt.
|How much holiday debt will you have?||% of Canadian millennials|
Of the millennials who went into holiday debt last year, 76% said they used credit cards to do so. But we also found holiday loans might become increasingly common among Canada’s millennials, with more than 1 in 10 millennials (14%) planning to take out a loan this holiday season.
There are a number of purchases that people think they’ll make this holiday season that will lead to debt, and not all of them are related to gifts. Here’s what we found.
|What will make you go into debt this holiday season?||Percentage of millennial respondents|
|Gifts for immediate family members||37%|
|Gifts for my kid(s)||29%|
|Gifts for my significant other||28%|
|Travel to visit friends/family||27%|
Why are so many millennials taking on debt for these items and experiences? Data on millennials’ holiday spending last year could help shed some light on this.
Most (39%) said they went into holiday debt last year because they simply didn’t have enough money to begin with.
At the same time, social and family pressures are also a factor: A little over a quarter (26%) of millennial respondents said their spending is motivated by a desire to give their kids a better holiday experience than they had as kids themselves. Some 23% said they promised loved ones gifts that were over budget.
Nearly half (48%) of Canadian millennials from our survey said they feel a lot of personal stress leading up to the holidays. And there are consequences for people’s relationships and finances.
For instance, our survey found that among millennials who plan to take out a loan to finance the holidays this year, 79% plan to keep the debt a secret from friends and family. And more than 1 in 5 millennials (21%) admit they argue more with their partner about finances during the holidays.
In addition, holiday spending can have a long-term financial impact as people struggle to pay off debt. We found that more than a quarter (28%) of millennials who went into debt last year are still paying off that debt nearly a year later.
And all in all, more than half of millennials (51%) would choose to forego spending on holiday gifts if they could.
So what would millennials rather be spending money on? More than a quarter (27%) of millennial respondents said they’d use it to pay off existing debts, 22% would use it to save up for a home or car, and 21% would put it towards travel.
When it comes to the holidays, there can be a lot of demands on your time and money. But with a little planning and strategy, you can enjoy the fun of gift-giving and spending time with friends and family without the burden of debt.
And you’ll be in good company — 49% of millennials we surveyed plan to make changes to their spending to lower expenses this holiday season.
It might seem awkward at first, but talking with friends and family about expectations for spending during the holidays can help a lot. We found just about a third (33%) of millennials who plan to save money this holiday season will agree upon a set budget with those they’ll exchange gifts with.
The holidays happen around the same time each year, which can be really helpful when it comes to planning. Nearly a third (31%) of Canadian millennials who plan to save money this year plan to do it by shopping for holiday gifts year-round.
If you see something on sale in July and know you can gift it to someone in December, go for it. You won’t have to compete with crowds and you may even be able to get it for a bargain if you buy it during special times of year, like Canada Day, or special sales events.
Other ways millennials plan to save this year that could work for you include using coupons (40%), making sure you get price matching on purchases (37%), or shopping at outlet stores (31%).
Think about who on your list might appreciate something unique — a handmade hat, for example, or a preloved book. More than a quarter (26%) of millennials who want to save this holiday season plan to give homemade gifts to loved ones, while 17% plan to buy used or consignment items, and 13% plan to re-gift.
It’s easy to feel FOMO around the holidays. In particular, advertising may lead to some impulse buys. In fact, more than a quarter or millennial respondents (27%) said they’d probably buy an item during the holidays after seeing an ad for it on social media. Consider using an ad blocker online to eliminate temptation.
On behalf of Credit Karma, Qualtrics commissioned a nationally representative online survey of 1,009 Canadians ages 18 and over in September 2019 to better understand how they spend during the holidays.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors' opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when it’s posted.
Why this existential dread around personal debt? According to our survey, it may be because Canadian respondents are worried about how debt could affect their long-term capability to save or ability to pay off surprise expenses.
When asked about their top financial fears, Canadians in our survey said having an unexpected expense, not saving enough to retire, and never being able to get out of debt brought them the most fear. (Learn about our methodology.)
Though Canadians’ financial fears can run high, there’s good news — you can work to overcome your financial fears with a little planning and strategy. We’ve got some tips below.
|When asked to rank their biggest fears, Canadians in our survey ranked death and personal debt, respectively, as their top fears.|
|When it comes to financial fears in general, Canadian respondents said they are most afraid of incurring a sudden, unexpected expense (44%) and not having enough to retire (38%).|
|43% of Canadians in our survey said they lose sleep over their finances. The top financial concerns keeping these sleepless Canadians up at night are debt (57%), retirement planning (22%) and lack of savings (55%).|
|The older the Canadians in our survey were, the less optimistic they felt about retirement: 26% of Gen Z is worried about not saving enough to retire compared with 36% of millennials and 40% of Gen X and older.|
|Younger generations are becoming more comfortable turning to their peers for financial advice — 41% of Gen Z and millennials said they occasionally or often ask peers for advice on financial issues, compared with just 20% of Gen X and older.|
See our key findings infographic
Canadians in our survey have a great fear of personal debt. We asked survey respondents to rank their greatest fears on a scale of 1 (greatest fear) to 5 (lesser fear).
Death ranked highest (2.6) followed closely by debt (2.8). Things Canadians were less afraid of than debt included public speaking (2.9), climate change (3.1) and spiders (3.6).
What are Canadians’ biggest financial fears? Our survey found unexpected expenses are the biggest worry (44%), followed by situations that could cause a change in their financial circumstances — retirement (38%), remaining in debt (25%) or unemployment (22%).
|What are Canadian respondents’ biggest financial fears?||Percentage|
|A sudden, unexpected expense||44%|
|I won’t save enough to retire||38%|
|I’ll never get out of debt||25%|
|I’ll never own a home||17%|
In addition to causing stress, financial worries lead 43% of Canadians to lose sleep. The top reasons Canadians lose sleep over finances are debt (57%), retirement planning (22%) and a lack of savings (55%).
Almost all Canadians in our survey have some financial fears — 94% of Gen Z, 93% of millennials and 89% of Gen X (and older) said they are at least a little worried about their personal finances.
However, financial fears of survey respondents vary depending on age. Here’s what we found when looking at Canadian respondents’ top financial fears by generation:
|What are Canadian respondents’ biggest financial fears?||Gen Z||Millennials||Gen X+|
|A sudden, unexpected expense||35%||36%||49%|
|I won’t save enough to retire||26%||36%||40%|
|I’ll never get out of debt||27%||31%||23%|
|I’ll never own a home||31%||23%||12%|
A recent Credit Karma survey of U.S. millennials found that many experience the “money scaries” — that is, they feel too burned out to deal with their finances. Our survey on Canadians’ financial fears suggests millennials north of the U.S. border struggle too.
Nearly one-third (32%) of Canadian millennials in our survey with at least occasional financial fears have avoided calls from a lender, and almost as many (30%) have avoided looking at their credit card statement.
Survey respondents’ attitudes toward retirement vary by age too, and Canadians tend to be more optimistic about their ability to save enough for retirement the younger they are. Over one-quarter of Canadian Gen Zers (26%) in our survey were worried about not having enough saved to retire, compared with 36% of millennials and 40% of Gen X and older.
Despite the high percentage of survey respondents worried about their finances, we found there may be some good news for the future. The way Canadians talk about money is changing. Younger generations are becoming more comfortable turning to their peers for financial advice.
In fact, according to our survey, 41% of Gen Z and millennials said they occasionally ask peers for advice on financial issues, compared with just 20% of Gen X and older.
This comfort that younger Canadians have about financial conversations may have two causes, our survey indicated. For one thing, Gen X (and those older than Gen X) are much more likely to view finances as a private matter (50%) than millennials (37%) and Gen Z (29%). Another potential factor could be that Gen X and older respondents said they feel more confident about their financial knowledge compared with millennials and Gen Z, so they might not feel as if they need to ask for advice as often.
A little planning and strategy can help you overcome your financial fears before they become financial nightmares. See our tips below.
Our survey found 44% of Canadian respondents would rather organise their closet than plan a budget. However, knowing how to make a budget that works for you can be a key way to prepare so you don’t feel so anxious about your finances. The Financial Consumer Agency of Canada has tips on how to make a budget and advice on how to stick with it.
It might seem awkward at first, but talking with friends and family about expectations for spending could help a lot. After all, you’re not the only one worrying about finances — our survey found 90% of Canadians have at least a little financial fear. So if you get past the initial awkwardness of a conversation about money, you might find that your concerns are similar.
Credit scores can be intimidating — 44% of Canadians we surveyed would rather check their grade after an exam than check their credit scores. Still, it’s important to have an idea of your credit health since having poor credit could increase what you pay to borrow money, leaving you with less money in your pocket. There are many factors that go into improving your credit health like making on-time payments and paying off credit card balances in full and on time.
On behalf of Credit Karma, Qualtrics commissioned a nationally representative online survey of 1,052 Canadians ages 18 and over in October 2019 to better understand their fears around finances.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors' opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when it’s posted.
Residents of the metro areas of Toronto and Vancouver face more than $20,000 in student loan debt on average — almost twice as much as those in Manitoba, the region with the lowest student loan debt among members, our analysis found. (Learn about our methodology.)
We also found that Canadian millennials in particular are impacted by student loan debt, which shows that, as in the U.S., the effects of student loans can linger long after graduation.
But even student loan debt balances in the tens of thousands can be manageable. We provide some tips below to help you manage your payments. But first, let’s take a look at what student loan debt looks like among members across the Great White North.
|On average, Canadian Credit Karma members who have student loans owe $17,741 in student loan debt.|
|Nearly 1 in 10 Canadian Credit Karma members (9%) has student loan debt.|
|Among Canadian Credit Karma members, average student loan debt is highest in Nunavut and lowest in Manitoba.|
|Toronto is the metropolitan area where Credit Karma members carry the highest average student loan debt.|
|More millennial Credit Karma members in Canada have student loan debt (14.62%) compared to other generations.|
Canadian Credit Karma members living in Nunavut carry the highest average student loan debt, at $25,644, according to our analysis. That’s almost $4,000 more than in Yukon, the region with the second-highest average student loan debt among members, and more than twice the average student loan debt as members in Manitoba, the region with the lowest average student loan debt.
Student loan debt by province/territory
Average among members
|Newfoundland and Labrador||$15,989|
|Prince Edward Island||$13,927|
While it has the highest average student loan debt among Canadian Credit Karma members, there’s also some good news coming out of Nunavut. On average, Credit Karma members there have paid off more of their balances than any other region except the Northwest Territories.
When it comes to the largest metro areas in Canada — Toronto, Vancouver and Montreal — average student loan debt is higher or about the same as the average among all Canadian Credit Karma members carrying student loan debt. Among metro cities, Toronto has the highest average student loan debt among members, at $20,809, with Vancouver only about $300 behind. Compared to the average for all members in Quebec, Montreal’s student loan debt among members is about $2,000 higher than that of members in the rest of the province.
Student loan debt by major metropolitan area
Average among members
As we previously found in the U.S., more millennial Credit Karma members in Canada carry student loan debt (14.62%) than any other generation. And millennials also have the highest average student loan debt balances among Canadian Credit Karma members, at nearly $19,000.
Gen Z members have the least amount of student loan debt on average, at nearly $12,000. But Gen Z members are almost as likely as millennial members to have student loan debt (14.42%). And both millennials and Gen Z members are far more likely to have student loans than Gen X (4.22%) or Baby Boomer (1.53%) members.
Average student loan debt across generations of Canadian Credit Karma members
% with student loan debt
Average student loan debt balance
Student loan debt doesn’t have to drive you crazy. We’ve got some tips on how to manage your monthly payments below.
If your monthly student loan payment is more than you can afford, you may have options to renegotiate the terms or apply for a Repayment Assistance Plan. You can find out more about your repayment options at the National Student Loans Service Centre.
Do your monthly payments feel like too much? You may be able to extend your repayment term, which could reduce your monthly payments. Keep in mind, though, that this usually means you’ll be paying more interest over the life of the loan.
If you have an online account with the NSLSC, you can use the Customize Payment Terms tool to see how different repayment amounts might impact your loan. Then, if you find an adjustment that fits your budget, you can request a Revision of Terms.
If your monthly student loan bill is due within the few days before you get your paycheck, it can feel more difficult to make that payment, since you could already be strapped for cash at that point in your pay cycle. If you have an account with the NSLSC, consider requesting a change of your payment due date through your NSLSC online portal so that you can switch to a date that’s more convenient for your budget.
If you have more than one student loan, keeping track of them could be tough. Consolidating multiple student loans into a single consolidated loan may make the repayment process simpler.
To determine the average student loan debt among Canadian Credit Karma members, we analyzed, in aggregate, more than 170,000 members who had student loan debt reported on their TransUnion credit reports in Q1 and Q2 of 2019. Among Canadian Credit Karma members with student loans, we analyzed the amount of student loan debt carried by certain age groups as reported on their TransUnion credit reports. We also looked at aggregate postcode data reported on TransUnion credit reports of Canadian Credit Karma members with student loan debt to develop a list of provinces/territories and metro areas where members held the most student loan debt on average.
A Credit Karma analysis found that last year, vehicle loan originations in August were 11% higher than the monthly average for the year. This spike suggests end-of-summer may be a hot time to shop around for a new car.
While our analysis found just 17% of Credit Karma members in Canada have an auto loan, those who do pay an average of $417 each month, our analysis found. And if you have a subprime credit score, you could pay more each month than those in other score bands, we found.
Canadian Credit Karma members with subprime credit paid an average $11 more per month than those with near-prime scores. Although this difference may seem small, it can add up to an extra $660 over the course of a 60-month loan.
If the idea of a hefty monthly payment seems intimidating, don’t sweat it. We offer some tips below to help you along your car-buying journey.
|Auto loan originations in Canada were 11% higher in August 2018 than the monthly average for the year.|
|The average Canadian monthly auto loan payment is $417.|
|Only 15% of Canadian millennials have auto loans.|
|In 2018, people with subprime credit scores paid an average of $11 per month more for their auto loans than those with near-prime credit scores.|
Based on our analysis, it’s clear that auto loans can be costly. But that doesn’t mean you can’t find the car you want at a price that fits your budget. We have some tips to help you along the way.
Only 17% of Canadian Credit Karma members have auto loans and of those, just 15% of Canadian millennial members have a car loan, according to our analysis. So, if you’re shopping around for your first car it might seem as if you’re on your own. But there are plenty of resources out there for first-time buyers. For instance, the Royal Bank of Canada has a checklist of things to consider when making your first car purchase, as does Carfax.
Our analysis found that the average monthly auto payment for Canadian Credit Karma members who have an auto loan is $417 — or about $5,000 a year — no small chunk of change. What’s more, Canadian members with subprime credit scores paid an average of $11 more per month (or $132 more per year) for their auto loans compared to those with near-prime credit scores. So when it comes to auto loans, it pays to know your budget and your credit health.
Once you’ve made up your mind to get a new vehicle, it can be tempting to rush to the dealer and buy the first car you see. But before you commit to adding a payment that could be hundreds of dollars a month, it’s a good idea to shop around for the best auto loan price and vehicle price.
Then, if you find a rate that you like, you may be able to apply for preapproval so you don’t have to haggle over financing at the dealer. Make sure you have a disclosure statement from your lender so you’ll be able to clearly see the terms of your loan. Just keep in mind that getting preapproved doesn’t mean you’re automatically approved for the loan, and you might have to submit more information when you formally apply. Once you formally apply make sure you have a disclosure statement from your lender to confirm the terms of your loan.
When it comes to used cars, checking a vehicle history report through a site like Carfax is key so you know if any damage to the car has been reported. If you run into any issues with the dealer, the Financial Consumer Agency of Canada has information that can help.
In order to determine auto loan trends in Canada for 2018, we examined, in aggregate, more than 2 million TransUnion credit reports belonging to members of Credit Karma Canada. All dollar amounts are in Canadian dollars (CAD) and all figures have been rounded to the nearest whole.
Unlike a traditional loan, you don’t get any money upfront. Instead, you make regular payments to fund the loan, and your payments are reported to credit bureaus.
Let’s take a closer look at how credit-builder loans work and what they can do for your credit.
A credit-builder loan is a type of loan that’s meant to help you build or reestablish your credit.
Read more: How to build credit
Unlike a typical loan, though, you don’t get any money upfront. Instead, you provide the loan amount yourself with regular payments over a set period of time. In the case of some savings loans, those payments might be made into an account that earns interest over time.
The “credit-builder” portion of the loan should occur as you make those regular payments. If your lender reports to the credit bureaus, you can start creating a history of on-time payments that could affect your credit scores and reports.
But keep in mind that these payments aren’t a shortcut to building credit. Credit-builder and -savings loans are one option that can help you start building or rebuilding credit — but you should think about other options that have recurring payments, such as a secured credit card. And if you miss payments or otherwise don’t manage the loan responsibly, you could end up hurting your credit in the long run.
Here are some things to consider before taking out a credit-builder loan.
Unlike unsecured credit cards, secured cards require a security deposit to open the account and set the credit limit. But if you pay your bill on time and in full each month, you might build your credit enough to graduate to an unsecured credit card.
Let’s take a closer look at how secured credit cards work and when they might be right for you.
A secured credit card isn’t totally different from other types of credit cards — you can use it to make purchases up to your preset limit just like you would with any other credit card. And you still have to pay your bill on a regular schedule.
What sets secured cards apart is that you need to put down a security deposit with the card issuer to open the account if you’re approved. The deposit serves as collateral for the card issuer, which often makes secured cards easier to qualify for. And you can receive the deposit funds back if you close your account, as long as you’ve paid off your balance.
The deposit also helps determine the card’s credit limit, which is usually equal to or higher than your actual deposit amount.
Your deposit may be as low as a few hundred dollars or as high as a few thousand dollars, depending on the credit limit you request and are approved for. For example, if you make a $500 deposit, it’s likely your credit limit will be around that amount as well.
If you plan to use the card to build credit, make sure that the issuer reports your payment information to the credit bureaus. When you make on-time payments, that’s positive activity that can help build your credit history — but only if it’s reported. Regular payments might eventually improve your credit enough to help you qualify for an unsecured credit card with better terms. Some card issuers even consider you for an unsecured card automatically after a certain number of on-time payments.
But a secured credit card isn’t a guaranteed way to build credit. If you fail to make your payments in full and on time, you could end up with a negative credit history. Plus, being delinquent on your account means the card issuer may use your security deposit to pay the balance you owe.
While secured credit cards can be great, it’s important to know what you’re getting into before applying. Here are a few things to keep in mind.
If you frequently travel abroad or make purchases online in U.S. dollars or other foreign currencies, it’s important to be familiar with the costs. A foreign transaction fee is a fee your card issuer can charge for converting your foreign purchases into Canadian dollars. For many credit cards, the foreign transaction fee is about 2.5%.
You may also see foreign transaction fees referred to as “foreign currency conversion mark-ups,” “foreign currency charges” or “foreign currency conversion fee.”
These fees can end up costing you big time if you’re not careful. Let’s take a closer look at foreign transaction fees and how to avoid them when travelling abroad.
Depending on your card, you may be charged a foreign transaction fee when you use your credit card to make purchases outside of Canada or in a foreign currency. For example, when you use your card to pay for something in U.S. dollars when travelling to the U.S., or when buying goods or services from U.S. websites.
When you make a purchase abroad or in another currency, your credit card company can do two things.
The currency exchange rate that your card applies to your purchase is often determined by the card network, such as Mastercard or Visa. Once your purchase amount has been converted into Canadian dollars, the foreign transaction fee is applied.
Here’s an example. Let’s say you make a purchase for $500 U.S. on your credit card.
$500 U.S. x 1.32 = $660 Canadian
$660 x 0.025 = $16.50
$660 + $16.50 = $676.50
When searching, review the credit card’s website and check for a foreign currency conversion or transaction fee.
It’s not so easy to find a credit card these days without a fee for spending abroad. Although you may be able to find one, you might still have to pay an annual fee. You’ll want to do the math to see if paying the annual fee in exchange for no foreign transaction fee is worth it to you.
If you’re given the option, it almost always makes sense to choose to pay in the local currency when paying for goods and services abroad. For example, if you’re in the U.S and you’re given the option of paying in U.S. dollars or Canadian dollars, you’re probably better off choosing U.S. dollars.
Having the choice to pay in the local currency or have the transaction converted to your home currency is known as “dynamic currency conversion,” which certain retailers, restaurants and even ATMs have. If you’re given that choice, it’s usually better to pay in the local currency than to have it converted to the local currency, because that conversion will probably cost a lot more. And you’ll likely still be charged the foreign transaction fee anyway.
Next time you travel or make a purchase abroad, plan ahead to avoid being hit with a big foreign transaction fee.
Start by reviewing the credit cards that you already have. If you do a lot of foreign travel or make lots of purchases outside Canada, you might consider signing up for a credit card without any foreign transaction fees — but make sure that the amount you think you’d save in foreign transaction fees outweighs the cost of any annual fee that may come with the card.
The answer depends on your present and future borrowing needs, your overall credit picture and the specific credit line or loan product you’re looking at.
We’ll run through some of the key differences between lines of credit and personal loans, and explore how those specifics might figure into which one is best for you.
Lines of credit and loans have some similarities, but there are several key differences, such as the repayment schedule and how often you can draw the funds.
A line of credit allows the borrower to draw funds up to a preset limit. Lines of credit offer a lot of flexibility — you don’t have to take all the money available to you in a lump sum, so you can borrow money only when you need it. You also don’t have to apply for a new loan if you need more money later. Instead, you can use your available line of credit for a new withdrawal up to your preset limit. When you repay any portion of the funds, they become available to borrow again if needed.
Loans are structured a little differently. With a loan, the borrower receives a lump sum from the lender and agrees to pay it back over a preset time period. If you want to change the loan amount or the length of the repayment period, you may need to apply for a new loan.
With a line of credit, you pay interest only on what’s been borrowed, not on the entire amount available to you. This is different from a loan, where you receive — and are charged interest on — the outstanding amount.
If your lender approves, the monthly minimum payments on a line of credit could consist of only interest. That may sound nice — it makes your monthly payment obligation minimal — but it’s also dangerous. If you continue to borrow, paying only the interest can be a recipe for getting into serious debt.
With loans, the monthly payments consist of principal (the amount you’ve borrowed) and interest, which could make for a more demanding monthly payment obligation.
A line of credit doesn’t need to have a defined repayment period (that’s up to the lender). If there’s no defined repayment period, you can pay off a line of credit in as much or as little time as you want, as long as you make your minimum monthly payments. Just keep in mind that the longer you take to pay off a line of credit, the more interest charges will accrue.
Personal loans usually have to be paid off in six to 60 months, depending on the time period specified in the loan agreement.
A line of credit is worth considering when you need to borrow money for several reasons over a short or long period of time. The revolving nature of the line of credit means you can borrow and repay funds as needed.
For instance, if you have credit card debt you’d like to consolidate but also may need to borrow more in the coming months, you might consider taking out a line of credit. The line of credit could allow you to pay off the existing credit card debt (at a potentially lower interest rate) while freeing up the ability to borrow for an unexpected repair, for example.
Likewise, if you’re planning to borrow money for ongoing home renovations that could end up being more or less extensive than you think, the flexibility of a line of credit might be ideal.
Be careful, though: A line of credit requires discipline. If you think it might be hard to limit yourself to necessary withdrawals only, the open-endedness of a line of credit could be a dangerous choice.
Personal loans are typically a good option for covering specific expenses, or for borrowers who want the stability of a fixed repayment schedule.
Loans can be ideal for one-time needs and expenses. For instance, if you have credit card debt you want to pay off, and you don’t anticipate needing to borrow again any time soon, a personal loan could make sense. It also could be the right choice if you need to pay for an emergency car repair or another sudden expense.
Similarly, if you’re in debt because of past missteps and you’re afraid you lack the discipline to handle revolving credit, a loan could be an attractive option. In this case, the limitations on what and how you borrow, and the certainty of a set repayment plan, could provide some welcome structure.
Lines of credit and loans have different features and frameworks. Whether one or the other is a good fit depends on the borrower and the terms of the credit line or loan product.
Carefully consider your current and future borrowing needs — and your spending habits — before deciding which option is best for your situation.
A line of credit is a revolving amount of credit that allows you continual access to funds up to a set limit. Unlike with a personal loan, you can withdraw funds as you need them, instead of having to receive your approved funds as a lump sum.
Once your line of credit’s limit has been set, you can draw as much as you like and pay it back over time. As you pay back what you’ve borrowed, you regain access to those funds for future borrowing.
Unlike some loans, lines of credit do not need to be used for a specific purpose and can usually be paid back on a less defined timeline. You may be able to access the funds at a lower interest rate than you’d get on a credit card, as well.
In this article, we’ll take a close look at how a line of credit works, the two key types, and the pros and cons of using one.
A line of credit is a revolving form of credit, which means you’re not limited to taking your money in one lump sum. Its flexible nature means that you’re able to borrow up to a predetermined limit as many times as you like.
Unlike a mortgage, auto loan or student loan, you don’t have to use the money you borrow from a line of credit for a specific purpose. You can borrow as much or as little as you need up to your approved limit, for as many reasons as necessary, and then repay the money you’ve borrowed.
At the same time, a line of credit isn’t free money — you’ll be assessed interest on what you borrow. Your interest rate, as well as your credit limit, may be affected by your credit scores and reports, and lenders may offer you a higher interest rate if you have a negative credit history.
While many lenders only require interest-only minimum payments on a line of credit, you’ll begin getting charged interest as soon as you withdraw funds and until you pay back that sum. If you never pay back more than the minimum payment on your line of credit, interest will pile up and you could end up with a heap of debt.
A line of credit can either be secured by collateral or be unsecured. This has a big effect on what lenders offer.
With a secured line of credit, an asset that’s used as collateral “secures” the money you borrow from the lender. That asset serves as security if you fail to repay the line of credit according to the loan terms.
A home or car is often used as collateral in these cases, but any item with a value high enough to secure the funds may work. In this scenario, the risk should be clear — if you don’t pay back the money you owe, then the lender can move to take the asset. The main benefit of a secured line of credit is that you’ll typically get a lower interest rate than you’d otherwise be offered on an unsecured line of credit.
A home equity line of credit, or HELOC, is a common secured line of credit. In this situation, the borrower’s home is the collateral. Because homes tend to be especially valuable assets, HELOCs often have a higher limit and lower interest rate than other lines of credit.
With an unsecured line of credit, no assets are put up as collateral, so the interest rate depends largely on information in the borrower’s credit profile.
When setting the limit on your unsecured line of credit, your lender will consider several factors, like your income, any existing debt and your credit reports. According to the Financial Consumer Agency of Canada, lenders usually require a household income of at least $35,000 or $50,000 to approve a line of credit.
Many personal lines of credit and student lines of credit are unsecured. A personal line of credit may be ideal if you need money to consolidate debt. Meanwhile, a student line of credit is money you can borrow for attending college or university. It can be used to help cover related expenses, like books, tuition and student rent.
While lines of credit can be useful, they are not right for every borrower. Here are a few of their pros and cons.
Keep in mind that what works for one borrower might not be best for another. Before getting a line of credit, consider the pros and cons, how you’d use it, and whether you’ll have the discipline and ability to pay back what you borrow without getting into too much debt.
A new Credit Karma/Qualtrics survey of 1,050 Canadians aged 18 to 38 shows half of young adults have spent money they didn’t have and gone into debt in order to keep up with their peers.
And some young Canadians may be falling into habits that perpetuate a cycle of overspending. More than a third (35%) of respondents said they don’t feel comfortable telling their friends “no” when friends suggest an activity they can’t afford. And 63% of those who have overspent to keep up have kept their debt a secret from friends. (Learn about our methodology.)
But it doesn’t have to be this way. We’ll give some tips below to help you curb the fear of missing out, or FOMO. But first, let’s take a closer look at why many young Canadians are overspending.
|Half (50%) of respondents spent money they didn’t have to keep up with their friends.|
|63% of those who went into debt to keep up typically keep the debt a secret from friends.|
|35% of respondents don’t feel comfortable saying “no” when one of their friends suggests an activity they can’t afford.|
|A full third (33%) of young Canadians who have gone into FOMO debt went more than $500 into debt. More than two-thirds (68%) went more than $100 into debt.|
|The top situations causing FOMO were vacations (45%), weekend trips (42%) and weekend or after-work dinner or drinks (36%).|
We’ve already dug into FOMO-fueled spending among young adults living in the U.S. A previous Credit Karma survey found that 39% of U.S. millennials have gone into debt to avoid FOMO and participate in activities with friends, which typically involve spending on things like food and drinks on nights out.
Similarly, in Canada, we found that experiences with friends — and their associated costs — are a big driver of overspending. According to our survey, just over half (56%) of young adults in Canada who went into debt to hang out with friends did so to buy food, while 41% did so to buy two-fours and other booze.
When it comes to planned events, nearly a third (31%) of respondents who overspent did so to travel with friends.
Still, not all FOMO spending is about trips or nights out with friends.
To keep up with friends, many young Canadians feel pressured to go into debt to buy stuff like clothes (32%), electronics (29%) and even cars (13%) or homes (11%). And 30% of respondents said they spend money on an item or experience at least a few times a year just so they can post about it on social media.
There’s some good news: 83% of respondents have a weekly/monthly budget they try to stick to. And 14% say they never spend impulsively.
Unfortunately, more than a third (34%) of those surveyed feel pressured by friends or social situations to spend money at least once a month. Some young Canadians are even going into debt as a result.
How much debt? Here’s a breakdown:
|In the past year, how much debt have you gone into to keep up with your friends?||Percentage of respondents who have gone into FOMO debt|
|$100 or less||32%|
|$101 to $250||17%|
|$251 to $500||18%|
|More than $501||33%|
As you can see, a little over two-thirds (68%) of those who’ve gone into debt to keep up with friends have gone more than $100 into debt in the last year.
That might seem a bit loonie. But a whole third (33%) have gone more than $500 in FOMO debt — enough for a couple of hundred double-doubles at Timmies.
By now, it should be pretty clear that many young Canadians experience a lot of FOMO that drives them to overspend. But why? Our research suggests it may all come down to social anxiety.
Of those who have gone into debt to keep up with friends:
Young adults in Canada clearly care about maintaining strong friendships and social lives — which is great — but it shouldn’t come at the cost of your financial stability.
Here are some suggestions to help avoid FOMO on a budget.
Be honest about your finances.
Our survey found that 69% of young adults in Canada think their friends make more money than they do. But in reality, far less (41%) actually know how much their friends make. You don’t have to have a big salary reveal with your friends, but being open about what you can and can’t afford might lead you you learn they’ve been feeling the same as you.
Suggest free or low-cost alternatives.
Sticking to a budget doesn’t mean you can’t have fun with friends. Consider things like a potluck, going for a hike in a park, or going over to someone’s house for a party instead of going out.
Plan how you pay.
Leave the credit cards at home to help avoid overspending. Consider keeping a separate savings account that you can use for short-term spending when you want to go out with friends. Consider taking cash or a card linked to that account when you go out, so you have a fixed amount you can spend.
On behalf of Credit Karma, Qualtrics conducted a nationally representative online survey in February 2019 of 1,050 Canadians aged 18 to 38 to learn about their spending habits related to FOMO, or the fear of missing out.
Before we discuss the importance of putting a fraud alert on your credit account, let’s talk about what identity theft is.
Identity theft is when your personal information is collected illegally and used for a criminal purpose. Personal information includes your name, address, phone number, date of birth, Social Insurance Number and credit card information. For example, if someone accesses your bank account without your permission or takes out credit in your name, this is identity theft.
“When you’ve been the victim of identity theft, it can cause serious harm to your credit health and make it difficult to obtain credit from lenders,” says Laurie Campbell, CEO of Credit Canada Debt Solutions.
Although the total reported dollar loss from identity theft is falling, the number of victims is on the rise. According to statistics from the Canadian Anti-Fraud Centre, the reported dollar loss from identity theft in Canada was nearly $10.5 million in 2014, down from $16 million in 2012. However, the number of victims is up 20 percent between 2012 and 2014.
In today’s increasingly digital world, we need to be more vigilant than ever to protect ourselves against identity theft. Setting up a fraud alert with both credit bureaus makes sense if you suspect you’ve been a victim of identity theft.
For example, if you receive a credit card in the mail that you never applied for or find a loan on your credit reports that isn’t yours, those are signs you could be a victim of identity theft. You may also want to set up an alert if your home has been broken into or you’ve recently lost your wallet — both offer criminals the opportunity to use your stolen information to commit credit fraud.
A fraud alert on your credit file indicates to lenders that they need to take additional precautions before offering credit.
When you apply for a credit card or line of credit, a lender will pull your credit report to make sure it’s in good standing before approving your application. That’s when they will see the fraud alert. Once a creditor sees that you have a fraud alert, they must take extra steps to verify your identity, which can help stop thieves from opening new credit in your name and may reduce the likelihood of you being a victim of identity theft.
The process of placing a fraud alert is slightly different with each of the credit bureaus.
You can place a fraud alert on your TransUnion® credit account by completing this form. In addition to filling it out, you’ll need to include a photocopy of both sides of your personal identification. You then submit the completed form and ID photocopies by mail or fax. Or, you can call TransUnion at 1-800-663-9980 and follow the automated prompts to place a fraud alert. To place a credit alert on your file, you’re charged a $5 non-refundable fee (plus applicable taxes). The alert lasts six years.
To place a fraud alert on your Equifax® credit account, you can call Equifax at 1-800-465-7166 and follow the voice prompts. Be prepared to supply your SIN and other basic information. The fraud alert is good for six years and costs $6, plus applicable taxes.
If you’d like to extend the alert, contact each bureau to discuss the process.
While fraud alerts can be a great way to protect your credit, it’s possible you could be notified of one on your account that you didn’t place, possibly in error.
If this happens, Campbell suggests you contact the credit bureaus immediately. “Get a copy of your credit reports and check for suspicious/fraudulent activity. You may need to contact government agencies, such as Service Canada, the Canadian Anti-Fraud Centre, your creditors and financial institutions, including those you do not recognize on your credit reports,” Campbell says.
By better understanding what a fraud alert is, you can place one on your account if you suspect you’ve been the victim of identity theft. Each of the credit bureaus has its own fraud alert, so you’ll want to place one with both of them. Fraud alerts last for up to six years, but can be extended or removed by contacting the relevant bureau.
One of the best ways to prevent identity theft is to be cautious with personal information. Be careful about whom you give personal information. When you’re entering your credit card PIN, shield it with your hand from people around you. Take the time to regularly check your bank and credit card statements for any fraudulent charges. If you see anything suspicious, report it immediately and place a fraud alert on your credit files.
In a worst-case scenario, identity theft can result in major financial losses and even filing for a consumer proposal or bankruptcy, so it’s best to avoid it at all costs.