You can tell your credit card provider, “sorry, I don’t have any money to pay my bill,” but if you are unable or refuse to pay, that does have consequences – both short-term and long-term. In this blog, I’ll explain the consequences of unpaid debt. In addition, I’ll propose some options to consider when you can’t repay credit card debt.

What happens if you can’t pay your credit card debt in Canada?

The reality is creditors expect regular recurring payments and will pursue all options to collect when you are unable to pay when you owe money. Ignoring the bills means you risk phone calls from a debt collector, lowering your credit score, and other potential impacts.

Read Transcript

Many people struggle with credit card bills but somehow manage to make their minimum monthly payments. They won’t get out of debt that way, but they are not risking further legal action as long as they maintain the minimum payment. But when you stop paying your credit card bills, or carry your balance over your allowed limit, then you are in default. What happens then?

Default occurs when you are unable to fulfill an obligation on a loan, and in the case of a credit card, that means you are not making the minimum monthly payment.

If you are unable or refuse to make payments and the debt hasn’t been paid according to the terms of your cardholder agreement, the consequences can include:

• Late payment fees
• Damage to your credit rating
• Higher interest rates
• Collection calls
• Cancellation of your credit card
• Loss of rewards points
• Lawsuits
• Wage garnishment
• Seizure of your bank account

The longer the outstanding debts remain unpaid, the more severe the actions your creditor will take to collect.

Accounts in collection

If you miss a payment or two, you can expect a politely worded letter or email from your credit card provider reminding you to make a payment. The hit to your credit score from a single missed payment will likely be temporary, assuming you catch up and have no other payment issues.

However, if you are several payments behind, your credit card company will likely send your account to a third party debt collector. Every issuer has different internal debt collection periods, but you can expect a collection agency to become involved when you are beyond 90 to 120 days late.

If your debt is large enough, your account may also be turned over to a lawyer for collection.

If you do not pay your bill, you can eventually expect more aggressive techniques to collect on the unpaid account.

Seizing money from your bank account

Most major financial institutions in Canada have the concept of a right of offset written into their credit card agreements. That means they can use money that you’ve deposited with them in a bank account to pay off an outstanding debt you might owe. This only applies if the credit card debt is owed to the same institution where you bank.

For example, let’s say you have a TD Bank Visa and you have a chequing account at TD. In this case, TD can legally seize money from your bank account, up to the full amount owing on your credit card, including interest and penalties.

They can do so without:

• Getting your consent
• First letting you know
• Leaving money in your account if the amount owed is greater or equal to the money in your account.

However, Capital One MasterCard can’t automatically seize money from your TD bank account. To do so, Capital One would need a court order.

Lawsuits and legal action

Credit card companies can sue you to collect on outstanding charges. However, lawsuits are expensive and time-consuming, so suing for non-payment is only likely to happen if you owe several thousands of dollars. In addition, the relevant statute of limitation period on the debt must not have expired. The debt does not go away, but the threat of a lawsuit is off the table, no matter what the collection agency says.

If you are being sued for credit card debt, you will receive a Statement of Claim. Suppose you ignore this notice or lose in court. In that case, your credit card provider may be granted a Judgment Order confirming that you owe the debt.  This order gives the credit card company, or their collection agent, the ability to pursue harsher means to collect money like garnishing your wages or freezing your bank account.

Garnishment orders

Once they have a legal court order, any credit card company can get a garnishment order. They can ask your bank to seize money from your bank accounts and direct those monies to them for payment. With a wage garnishment, a portion of your pay is deducted until the debt is paid in full. The only way to stop a wage garnishment or unfreeze a bank account is to pay the debt or file a consumer proposal or file a bankruptcy.

What happens when your credit card company sends the debt to a collection agency?

Most companies will pursue collection using their in-house collection department for a few months. However, after several months they will write off your account as uncollectible and hire a collection agency to pursue payment. The collection agency may get paid a commission or may buy the debt for pennies on the dollar.

Before a debt collector can contact you, they must send a private letter by mail or email outlining how much you owe, who the original creditor was, and the name and contact information of the collection agency and collector demanding payment.

Once this letter is sent, you can expect calls to begin.

Debt collectors often use aggressive tactics to get you to honour your payments, like calling you repeatedly, contacting your relatives, and calling at inconvenient hours.

It is important to know your rights and understand what a collection agency can and can’t do. For example:

• Collection agents can’t call past 9PM on weekdays or 5PM on weekends and on statutory holidays.
• In Ontario, once you speak with a collection agent, they can only contact you up to 3 times a week to request payment.
• Collection agents can call your employer or family but only to confirm your contact information, or in the case of your employer, to enforce a wage garnishment.
• Collection agents can sue you for outstanding credit card debts but are unlikely to do so for small debts.
• Collection agents can usually accept settlement arrangements (but always get any agreement in writing before you pay).

Unless you have committed fraud, you can’t be sent to jail for unpaid credit card debt.

Always ensure you are talking with a legitimate collection agency which is why you should request written documentation before providing any personal financial information, negotiating any terms, or making any payments.

Once your account is sent to collection, this information is reported to the credit bureau. Accounts marked as ‘in collection’ have a very negative impact on your credit score and this notification will remain for 6 years.

How long can a debt collector chase you for old credit card bills?

The statute of limitations for debts in Canada varies by province, from 2 years to a maximum of 6 years. For example, in Ontario, this means that you cannot be sued in the courts for an unpaid unsecured debt 2 years after the date of last activity, which is usually your last payment date or last date you charged something on your card.

It’s important to understand that a debt collector can continue to call to collect on an old debt, even one that has been removed from your credit report. While they can no longer pursue you in the Canadian courts, they can continue to demand payment as the debt never goes away unless it is paid, or you file a bankruptcy or consumer proposal.

What happens to your debts after you leave the country?

If you have lived or worked in Canada and applied for credit here, you may owe money on your credit cards. What happens if you leave Canada without paying your credit card debt?

First, unpaid debt owing to a Canadian company is reported to the Canadian credit bureaus only. For example, missed payments on your Canadian cards are not reported to US credit reporting agencies.

Second, the debt will remain owing and could cause problems if you have assets in Canada or if you intend to return in the future.

If you own property or have a bank account in Canada, your creditor can still sue you if the limitation period has not expired, however, they are only likely to do so if the debt is large. If you are not available to defend the lawsuit, a Canadian judge may render a verdict in favour of the credit card company which can lead to a court order to seize any property you have in Canada and maintain their right to pursue you for the debt if you return to Canada.

Credit card companies rarely pursue debtors in other countries, as this involves foreign courts and engaging lawyers who can act in those countries, however, it can happen if the amount you owe is significant.

If you are planning on returning to Canada, unpaid debts can impact your ability to gain new credit when you return. Filing a bankruptcy while living abroad can be done but has extra consideration.

How does unpaid credit card debt affect your credit score?

There is no doubt that late payments are very harmful to your credit rating. While Equifax and TransUnion have different calculations, payment history makes up 35% of your overall credit score. How much late or missed payments impact your credit score depends on several factors, including:

• How large the payment or outstanding debt is
• How long the payment is overdue
• How many late payments you have
• What your current credit score is

If you have a credit score over 800, one late payment can drop your score 30 points or more. If you have a low credit score, an additional late payment will have a smaller impact but it will take you a very long time to recover from a recurring credit history of missed payments and accounts in collection.

If your payment is less than 30 days late

If your payment is less than a month late, there’s no reason to panic. You will be charged interest and a late fee by your credit card issuer, but your credit score should not be affected. Most companies do not report missed payments to the credit bureau until they are 30 days late.

If your payment is more than 30 days late

At 30 days late, your credit card issuer will report your missed payment to the major credit bureaus. Consequently, your creditor will add a note to your credit report indicating your payment is late. This note may have the number code R2, meaning you have a revolving line (credit card) that is 1 month late, or it may simply say 30 days past due. Negative information like a late payment will remain on your credit report for up to 6 years.

If your payment is more than 4 months late

As you continue to miss credit card payments, these will be added to your credit report. Your account will be marked as R3 for 2 months late, R4 for 3 months late etc., up to R5.

Your creditor has the right to close your account, which means you no longer have access to this credit card to make purchases. Closed accounts on your report will also increase your utilization rate, which will lower your credit score.

If you miss a payment by more than 120 days, your creditor may label your account as a charge-off. A charge-off means your creditor has written off the account as a bad debt. At this time, your account will be marked as an R9. Accounts in collection or in charge-off severely harm your score and are an indication to future lenders that you may not be a good credit risk.

If you have accounts this far in arrears, you may find it difficult to obtain new credit.

At this stage, your creditor may also transfer or sell the debt to a collection agency.

If you make several late payments

Credit scores are a mathematical calculation based on the amount and mix of credit you carry and how you maintain payments. So, it’s not surprising that the more late payments you make on more accounts, the worse your credit score will be.

However, the real issue is that if you are behind on your credit card payments, you are experiencing severe debt problems. The consequences go beyond your credit score. Eventually, your credit will be cancelled, and you will find it difficult to borrow from anyone other than perhaps payday lenders. Getting a payday loan will only worsen your financial problems.

If you can’t pay your credit card debts, it may be best to consider other options to eliminate your credit card debt.

Options to consider if you can’t pay credit card debt

According to the Canadian Bankers Association, 30% of Canadians carry balances on their credit cards from month to month. If you are significantly behind on your payments and can’t afford to pay off credit card debt on your own, you still have options.

It’s entirely possible to do nothing, and there are times when you can ignore the calls and not make any payments. Consider waiting it out if:

• you are creditor proof which means you have no assets to be seized and no wages that can be garnished
• the debt is beyond the limitations period barring lawsuits
• you don’t care about your credit score, or the debt is close to the time during which it will fall off your credit report (6 years from your date of last activity)

While you can consider a consolidation loan to consolidate credit cards into a new lower-interest loan, avoid high-interest consolidation loans, which often carry a higher rate than your credit cards, even though the monthly payments might be lower.

OK, now that we know what strategies to avoid, here are some options to consider when you fall behind on your card payments.

Make repayment arrangements

Depending on your financial health, you can negotiate payment terms with your credit card company or their debt collector. In addition to arranging monthly payments, ask for a reduced interest rate and waiver of penalties on overdue accounts to help make repayment easier.

This option is only likely to work if you are only a few months behind and have sufficient income to repay your debts in full. Before making any payments, get all agreements in writing. Understand the statute of limitations for your province, which prohibits anyone from suing you to collect. Knowing your debt is too old to sue to collect may give you some bargaining power.

Negotiate a debt settlement

If the debt is old and outside the limitations period, offer a settlement amount. Depending on the amount and how old, a good place to start is 20 cents on the dollar.

Three things to consider before making a debt settlement offer:

1. Make sure you can afford the offer. It’s essential to complete these payments. Otherwise, you will find yourself facing the entire debt again.
2. Be aware that making a settlement payment will update the last payment date resetting the clock for both the limitation period and the 6-year period before the account is removed from your credit report.
3. Make sure that all your debts that need to be settled are settled, as only dealing with one or a few of them might only be a band aid solution.

Ultimately, you may need help from experts to clear your credit card debt.

Repay through a debt management plan (DMP)

A DMP is a repayment arrangement through a credit counselling agency. The credit counsellor may be able to stop or reduce the future interest charges, which means your balances won’t continue to grow. However, you must commit to repay the entire balance owing at the time you sign up. A credit counsellor cannot negotiate a debt settlement for you.

If you need help making a settlement offer, consider talking with a Licensed Insolvency Trustee.

Consider a consumer proposal

If you struggle to repay a lot of credit card debt or have other unsecured debt, a consumer proposal can provide needed debt relief.

Governed under the Bankruptcy & Insolvency Act, a consumer proposal provides several benefits:

• A consumer proposal stops various forms of creditor actions, including collection calls and wage garnishments.
• It allows you to repay back less than the amount you owe.
• In addition to eliminating your credit card debt, it can help you deal with monies owed to other creditors, including CRA, payday loans and certain student loans.
• Most proposals are completed in 3 to 5 years (maximum).  Lump sum settlements are also possible.
• It gives you the power to negotiate payment terms you can afford.
• A consumer proposal is binding on all creditors.

Lastly, consider filing bankruptcy

If you can’t make a viable consumer proposal and you are not creditor-proof, bankruptcy may be an option.

Need help choosing between these debt relief options? Give us a call to book a free, confidential consultation where we will discuss your situation and set you up on the path of becoming debt-free.

The post Unpaid Credit Card Debt: What Are the Consequences? appeared first on Hoyes, Michalos & Associates Inc..

To help you avoid the common pitfalls that come with owning a credit card, I talk with Diane Cunha, one of our certified credit counsellors. She shares tips for using credit wisely to avoid debt problems. 

How do credit cards work?

One of the reasons cardholders get into trouble with their credit cards is they don’t understand monthly billing cycles and due dates. Not understanding when credit card companies start charging interest can cost you money if you don’t have enough cash to pay the bill in full before interest starts clocking, especially if late and partial payments accumulate interest charges of 18% to 29% on an unpaid balance.

Here are three credit card billing terms you should understand:

The credit card billing cycle refers to the start and end date of your credit card statement and typically covers a 30-day period. Your billing cycle will fall on the same days every month. For example, your billing cycle may run from December 8 to January 7. Any purchases, cash advances, and payments you make in this period will appear on your January 7 statement. 

The due date refers to the date by which you must pay your credit card bill or else you will be charged interest and late payment penalties on your unpaid balance. Your credit card due date is typically 21 to 25 days after the end of your billing cycle. For example, if the end of your billing cycle is January 7, then your credit due date would be January 28. Your billing cycle and due date is always marked on your credit card statement.

The grace period is the 21 to 25 days after the end of your billing cycle until the date your credit card balance is due to be paid before interest charges will begin.

Why is understanding how credit cards work important? 

You might think you get a 30-day grace period when you buy something on a credit card, but that’s not always the case.  In our example above, if the only charge you put on your credit card in a month is a purchase you made on December 9, and the due date is 21 days after your last statement date of January 7, then you technically have until January 28, or 50 days, to come up with the cash to pay of your purchase. This is good to know if you are making a big purchase.  If, however, you put that same charge on your credit card on January 7, the last day of your billing cycle, you have only 21 days to make sure you have enough money to pay off your credit card before interest will be charged on that purchase.

8 ways to avoid credit card debt

Once you have an understanding of how credit cards work, the next step is to avoid accumulating debt on your credit card by using credit wisely. Here are eight tips:

1. Limit the number of credit cards you have. These days, the major credit card providers like Visa and MasterCard are accepted virtually everywhere. Therefore, there’s no need to have multiple credit cards in your name. Limit yourself to owning just one or maximum two credit cards at one time.
2. Keep your borrowing limit low. The lower your limit, the less likely you are to over-extend yourself credit-wise. Keep your credit card limit low enough that you can afford to repay the balance in full each month.  If you need a higher limit for a special expense, say a vacation, you can increase your limit temporarily, then lower the limit again when you no longer need that much credit. 
3. Pay off your credit card balance in full at the end of every billing cycle. Paying off your balance in full by the due date saves you money in interest charges and will help build a good credit history over time.
4. Plan big purchases ahead of time. Never use a credit card as a borrowing tool. If you are planning to make a big purchase, make sure you’ve saved cash for that purchase ahead of time. Use a credit card to buy an expensive item so you don’t carry large sums of cash with you to the store, but then be prepared to apply that cash you saved for the purchase towards your card balance immediately. 
5. Avoid cash advances. A cash advance is an act of withdrawing cash from your credit card, and it’s costly. Think of cash advances as high-interest loans and there is no grace period on cash advances from your credit card. Credit card companies charge an interest rate of 20% or more plus a flat fee the day you take out a cash advance, and the interest charges accrue immediately and until you pay off the entire borrowed amount. 
6. Be strategic about the credit card you choose. Choose carefully the type of card you want based on your wants and needs. If you think you’ll carry a credit card balance, then it would make sense to go for a low-interest card. On the other hand, if you are a traveler, then having a credit card that gives air miles on purchases is a good idea. By thinking about the type of credit card you should apply for ahead of time, you avoid signing up for more cards later on.
7. Automate your credit card bill payments. By automating your credit card bill payments, you never have to worry about paying your bill on time. Align your automated bill payments with the days you receive a paycheque. Consider making small micro-payments on your credit cards every month so you don’t find yourself with a big bill at the end of the month you can’t pay.
8. Pay more than the minimum monthly payments. If you do have a balance on your credit card, the only way to avoid getting deeper into debt is by paying more than the minimum monthly payment. You can reduce the life of your debt dramatically by making extra payments on your credit card balance. Additional payments also allow you to save on interest charges.

Using a secured credit card to rebuild your credit score

After our clients are discharged from a bankruptcy or consumer proposal, they use a secured credit card to rebuild their credit scores. A secured credit card is backed by a deposit you make before having the credit card issued to you. The bank uses your deposit as collateral, or security, in case you can’t repay charges you make on your secured card. 

To successfully rebuild your credit though, you need two more things in addition to using a secured credit card: 

• Make sure you can handle credit, meaning you can repay the balance in full each month.
• Prove that you don’t need all the credit available to you by not borrowing to your maximum limit every month. 

For more information on how to use a credit card wisely to avoid debt problems, tune in to our podcast with guest Diane Cunha or read the full transcript below. 

Additional Resources

• Why Budgeting is a Bad Idea
• The No Budget Budgeting Video
• Debt Free in 30 YouTube Channel

FULL TRANSCRIPT – Show 235 Using a Credit Card Wisely To Avoid Debt Problems

Doug Hoyes:  I have nothing against credit cards. If I’m going to the store to buy something for 200 bucks I’d rather carry a credit card than $200 in cash. That’s why a credit card is a good substitute for cash and you may even be able to earn some points or other rewards for paying with a credit card. Used prudently, a credit may also help you improve your credit score which may lower your borrowing costs on big ticket items like a car loan or a house mortgage. Credit cards themselves are not a problem but credit card debt is. If you don’t pay your balance in full at the end of the month you get hit with interest charges which, on a typical credit card, can be almost 20% and a store credit card or a gas company credit card can have an interest rate of 25% or higher. So how do you use a credit card wisely? What should you know about how credit cards work before you apply for a new credit card?

                          I’m here today with one of our accredited credit counsellors, Diane Cunha, to talk about credit cards and credit card basics. So Diane, welcome to Debt Free in 30.

Diane Cunha:    Thank you for having me.

Doug Hoyes:    So you’re a first time guest here on Debt Free in 30, so I’d like you to start by giving the listeners a quick overview of your background.

Diane Cunha:    Well, I’ve been in the financial field, so to speak, for about seven years now. I worked at a bank for three and a half, I also worked for two not-for-profit counselling agencies as a credit counsellor.

Doug Hoyes:    So you worked at a bank – and I don’t want you to tell me what bank it was – I mean I know but it’s not relevant here. What was that like?

Diane Cunha:    Over all it was a good experience. I learned a lot about finances, I learned a lot about what options are there for people; but there was the aspect of sales with the bank. There was the aspect of you need to make sales in order to make the bank money.

Doug Hoyes:    Yeah, so you’re advising people on “Now you’ve got to get this credit card, you got to do this, you got to do that.” And we’ve talked about that on this show before when Sandi Martin was on we talked about that as well. So obviously there’s an element there. But okay, let’s get back to the present day; so what is it you do here at Hoyes Michalos then?

Diane Cunha:    So I do a wide range of things. I am a credit counsellor; I see people during their consumer proposals or bankruptcy sessions. So during that time period you are required to meet with a credit counsellor as a requirement for discharge duties. What we talk about is budgeting, we talk about re-establishing credit, we talk about the future; because there’s nothing we can essentially do with what happened in the past. We want to move forward from everything. So we do talk about how to re-establish positive in your credit world.

Doug Hoyes:    Yeah, it’s designed to help people; that’s the whole purpose of these sessions.

Diane Cunha:    Exactly.

Doug Hoyes:    And obviously you talk about budgeting and things like that.

Diane Cunha:    Hm-mm.

Doug Hoyes:    Okay, so let’s talk about credit cards. The typical person we help here at Hoyes Michalos owes around $17 000 on personal loans and lines of credit and they owe almost $16 000 on credit cards. So it’s the second biggest debt they owe, much larger than what they owe in income taxes, student loans and other forms of debt. So it’s a big problem and, of course, the problem is that the interest rate on credit cards are a lot higher than what you typically pay on a personal loan or a line of credit so obviously credit card debt is something to avoid. So let’s say that one of our listeners gets a credit card offer in the mail or they get offered a credit card when they walk into a store or, you know, their friendly neighbourhood bank teller, as you just described, is offering them a credit card; what should they be thinking about before they agree to sign up for a credit card?

Diane Cunha:    So they should be thinking; three major points is why are they getting the credit card; so what are the benefits of it? It’s convenient. A credit card is convenient when, you know – I tell a lot of the clients an emergency would be; I’m stuck in a parking garage, I can’t get out. I need a credit card to get out.

Doug Hoyes:    It would be good to have one then?

Diane Cunha:    It’s convenient to get out of there. So another point to make is that credit cards do help establish and re-establish credit if your credit is not in a good spot. It’s also great for rewards and points if you use it properly. So it’s definitely based on a personal basis of why you’re getting that credit card.

Doug Hoyes:    But is it also a risk then that if I’m getting a credit card for points I can be spending too much on it then too?

Diane Cunha:    That’s right. So essentially everyone knows themselves is what I say. I say, you know what, if you don’t trust yourself with a credit card, use it for gas. Fill up that tank; $50. You can’t spend $100 at the gas station when your tank is 50.

Doug Hoyes:    Yeah, and I think obviously having access to credit is one of the dangers that, you know, people maybe aren’t quite so cognisant of right from the outset. So, for almost all of our clients, and you’d know this, they have credit card debt and it didn’t happen overnight, it built up over time because they didn’t consider their credit card just as the thing “I put 50 bucks’ worth of gas in” it was, you know a way to borrow and that becomes a significant problem. So normally at the end of the show we hit the practical advice section but let’s just do that right now. You meet with people every day, they want to re-establish or build their credit, they want to do it by having a credit card; so give me your top four tips for people who want a credit card from you.

Diane Cunha:    So, when I see people – again, first thing is you only need one. Years ago maybe MasterCard wasn’t accepted at certain places but Visa, MasterCard are the two top –

Doug Hoyes:    Pretty much everywhere.

Diane Cunha:    Everywhere, you know. You can use those cards online, you can use it travelling, whatever. It’s focusing on – you essentially just need one. I don’t really push for anything more than that especially for establishing; you don’t want to get back to the place where you were at before.

Doug Hoyes:    So one is better than 10 is what you’re telling us here.

Diane Cunha:    100%.

Doug Hoyes:    Okay, so you don’t need to be signing up for every credit card offer that’s out there, you know. One, maybe a maximum of two, like you say, maybe there’s a place MasterCard isn’t accepted so I get a Visa or something like that.

Diane Cunha:    Right.

Doug Hoyes:    Okay, so tip number 1, you know, one credit card maybe two.

Diane Cunha:    Right.

Doug Hoyes:    Second tip.

Diane Cunha:    Second tip is keep your credit limit low. You don’t have to have a 10 000, 15 000, $20 000 credit card limit. What are you purchasing for that type of limit? Essentially what the credit card companies do is that they see “Alright, you can handle 500. You’re paying us back, you’re making us money with that interest. You’re paying interest on those products so we will offer you more” in hopes that you will continue to pay interest and continue making them money. So I tell people keep it low. You don’t need a credit card of 5, $10 000. What purchase are you making and really re-evaluate that. Unless you’re going on a trip or saving for that, then yeah, sure, have a $5 000 limit. Keep that in the back of your mind and, like I said, it’s good to have for trips and it’s a convenient factor. But, you know yourself better; you don’t need a limit of . . . excess –

Doug Hoyes:    Yeah, and so the credit card company will automatically increase it if things are going well . . .

Diane Cunha:    Or they’ll ask you and the thing is, is what I find a lot of clients is, they will ask you but they’ll ask you when you need that money. So you’re maxed out or close to being maxed out so they’ll say “Hey, you know, you’re qualified, you’ll be qualified for another 2 000.” They have to ask you by law but majority of people that I see, they say yes because they’re in a bind and, you know, they’ve already essentially racked up that debt so they need that money to get out.

Doug Hoyes:    So in your example where I’m going to be going on a trip, I’m going to be, you know, paying for a lot of hotels and airlines and all the rest of it. So okay, a $5 000 limit would be good. I get back from my trip, would you recommend then calling up the credit card company and saying “Okay, I’m not going on another trip for a year, knock me back down to a thousand bucks?

Diane Cunha:    Yeah you could. I mean, like I said, people know themselves better; if you went on this trip, you paid it off in full which is the third point – you should be paying off your credit card in full every month – then you know you can keep it up that high. Maybe you want to take trips every few years, I don’t know. It’s more of you know yourself better but you don’t need – like I said, you don’t need an extensive credit limit.

Doug Hoyes:    Keep your limit. And then paying your balance off every month. Like that’s kind of like a no-brainer. And I understand our clients get into trouble because they don’t have the money to pay it off every month and that’s what causes the issues. But, as a starting point, you got to pay it off every month because otherwise you’re getting killed on interest.

Diane Cunha:    Right, and I think that people forget that, you know, when you get that statement – I think it was only recently in the past maybe 10 years that they started writing down, you know, it’s going to take you 82 years to pay off your credit card. And I mean it’s very small, it’s in the corner, and people I think, have this illusion that this minimum payment is all I’m required to pay. Well yeah, to keep your credit great but to keep balances down to zero you should be paying everything.

Doug Hoyes:    I met with a guy yesterday who told me it was 103 years.

Diane Cunha:    Yeah.

Doug Hoyes:    So that’s a record I think for me, yeah.

Diane Cunha:    So yesterday I saw somebody who was 54.

Doug Hoyes:    Yes, I mean that’s insane.

Diane Cunha:    It’s 54 years for $6 000 worth of credit card debt.

Doug Hoyes:    Wow. Yeah and this guy I think had 13 000 so it’s about double so it kind of makes sense that if you’re only paying the minimum. So okay, so one or two credit cards, keep your limit low, pay off your balance in full very month; what would your fourth tip be?

Diane Cunha:    Also you should plan out big purchases. So, you know, I don’t think everybody needs to buy a big TV every year. But, you know, those flashy ads, Black Friday, Boxing Day; those things come up and it’s like “Yeah, you know what, I really do want to buy a TV.” Or, if you want to reward yourself, plan out those big purchases, pay it off, have it saved, put it on the credit card, get the rewards and pay it off and pay no interest. The banks don’t like that. They want you to pay interest. They don’t want to give rewards to people who pay off their balance in full, but that’s what you should be doing. It’s just beneficial to you and do yourself in the long run.

Doug Hoyes:    So plan it out and take advantage of what you’ve got there. Okay so, that’s good advice. Now, as I said in the opening my problem with credit cards is the high interest rate.

Diane Cunha:    Hm-mm.

Doug Hoyes:    So let’s talk about how that works; when does the bank start charging interest? So I know they don’t start charging interest the moment I make a purchase; that’s the whole beauty of having a credit card. So how does it work; do I get an automatic, you know, 30 days’ grace period and then they start charging me interest? Is it always that way?

Diane Cunha:    No. So the 30-day grace period is on every purchase they make which is – it’s not true. So people think “You know what, if I buy this, 30 days from now I’m not going to have to worry about interest.” Well, it’s a little bit more complicated than that. So, what you need to know is two things; the billing cycle and the due date.

Doug Hoyes:    Billing cycle and due date. Okay, so let’s start with billing cycle; what does that mean?

Diane Cunha:    So billing cycle starts – there’s a start date and there’s an end date; it’s typically 30 days and it’s typically the same every single month. So for example, December 8^th to January 7^th, all purchases, cash advances, payments – anything you’ve done during this period would appear on your January 7^th statement.

Doug Hoyes:    Yeah, so my credit card statement is always around the same time of the month.

Diane Cunha:    Right.

Doug Hoyes:    You know; it gets cut off on the 7^th or the 8^th or the 9^th. I get it in the mail or on my computer two or three days later.

Diane Cunha:    Right.

Doug Hoyes:    So that’s my billing cycle.

Diane Cunha:    Right.

Doug Hoyes:    Okay, and the other thing you said was the due date.

Diane Cunha:    Correct.

Doug Hoyes:    So what’s the difference then?

Diane Cunha:    So the due date is when you must pay your bill or you will be charged interest. And pay your bill in full, not just the minimum. So this is typically 21 to 25 days after the end of your statement period. So, in our case, the statement ended January 7^th so our payment is due January 28^th So both your statement period and due date will clearly be marked on the statement; it will tell you, it has to be listed there.

Doug Hoyes:    There’s no mystery to this. So if my statement date is January 7^th or February 7^th – it doesn’t matter what month it is – in this particular case 21 days’ grace period, I’ve got 21 days to pay. So that means then that – okay, we’re getting into numbers here. Let’s slow this down here. So am I getting 30 days to pay, am I getting 21 days . . . like how long is it until I’m going to be charged interest?

Diane Cunha:    This is what confuses people; so many people think they have 30 days’ interest free on everything they buy with their credit card but they don’t. They can actually have between 52 and 21 days from any individual purchase to pay it off. So if you charged something partway through your billing cycle, your real grace period on the purchase is the time between the date you put the purchase on and your due date.

Doug Hoyes:    So in the example you just gave, my statement ends on the 7^th of the month.

Diane Cunha:    Yes.

Doug Hoyes:    So if I bought something, let’s just say exactly on the 7^th, I’m going to have to pay for that 21 days later on the 28^th. So I got 21 days’ free interest.

Diane Cunha:    Right.

Doug Hoyes:    If I made the purchase the day after my statement – so on the 8^th – then I get 30 days on the statement plus another 21 days after that.

Diane Cunha:    That’s right.

Doug Hoyes:    And so that’s where, if you look at the calendar “Okay, I guess I could get a maximum of 52 days without having to pay interest but it could be as little as 21 days depending on when it falls.”

Diane Cunha:    Right, and it’s a good way to plan it out. So, if you are making – if you have a big purchase coming up and you do keep track of those billing cycles, if you make that purchase, well essentially you have 52 days’ and start making payments towards it. You can make payments during your credit card period, that statement, or even before the due date. I tell people once you spend something, pay it off right away. Don’t even wait till the statement.

Doug Hoyes:    That’s a key point and that’s why I’m of the belief that a credit card should be a substitute for cash; it should not be a way for borrowing. So okay, in your example, I’m going out to buy that big screen TV which costs a thousand bucks or whatever it is, I don’t want to carry a thousand bucks cash with me so I put it on my credit card but there’s no reason when I get home that I can’t go online and transfer the thousand bucks right into my credit card; boom.

Diane Cunha:    Exactly.

Doug Hoyes:    Or I guess if you want to get a little cuter and you understand how all these billing cycles work, it’s like “Okay, I know that the due date for this particular purchase is the 28^th so I’m going to go online and I’m going to program the payment to go on my credit card on the 27^th and that way I’m good.

Diane Cunha:    Right.

Doug Hoyes:    So lots of ways to handle that.

Diane Cunha:    Hm-mm.

Doug Hoyes:    So you’re saying that your method is the simple way. I don’t need to be tracking what the due dates are and just, you know, pay it all the time –

Diane Cunha:    Pay it; out of sight, out of mind.

Doug Hoyes:    Out of sight, out of mind. And I’m a big believer – I believe I said it in the book; every show I always get a plug-in for my book in case you’re not familiar with how we do it in here.

Diane Cunha:    I am.

Doug Hoyes:    “I’m very well familiar with how you like to plug your book at work.” And in the book I say “Look, if you get paid every two weeks, why not make your payments every two weeks. So why not every two weeks, log in, see what’s owing on my credit card, put the payments through. There’s no reason you can’t do that. You don’t have to be waiting till the last possible day.

Diane Cunha:    That’s right.

Doug Hoyes:    Okay, so really what you’re saying then is a credit card is a substitute for cash. If you’ve got the money in your bank account then fine, use your credit card to pay it off.

Diane Cunha:    Right.

Doug Hoyes:    It’s nice and simple in that.

Diane Cunha:    Exactly.

Doug Hoyes:    Okay, now we’ve talked about purchases but there’s another thing you could do with credit cards.

Diane Cunha:    Yes.

Doug Hoyes:    You’ve probably heard of this; I can get a cash advance. And this is very dangerous obviously because interest does not work the same for cash advance as it works for a purchase; am I right?

Diane Cunha:    That’s right. So the way cash advances work – and I see it all the time at the bank. A lot of people come in and I kind of steer people away from that because the way cash advances work, there is no interest free grace period.

Doug Hoyes:    There is no interest free grace period on a cash advance?

Diane Cunha:    No.

Doug Hoyes:    Okay.

Diane Cunha:    You are charged interest that day. You’re also charged a fee to take that money out. I had a man come in at the bank once and he was taking out $30. I said “This is going to cost $3.50 plus the interest. And yet he wanted to do it but he had $30 in his bank account. I just didn’t understand the logic of that. I said “You’re paying money to borrow” which is silly.

Doug Hoyes:    And is that typical on all credit cards?

Diane Cunha:    Yes.

Doug Hoyes:    I mean that’s the kind of thing, you can look at your statement and find out is there is a cash advance fee. Obviously there’s interest – there’s no doubt about that. Is there a fee, how much is it? And you’re right, to borrow $30 and pay $3.50, I mean that’s –

Diane Cunha:    And that was like a few years ago. I don’t even know what it is now.

Doug Hoyes:    Yeah, it could be – and I mean every credit card’s different, they’ve all got different terms and whatnot, but that’s something you definitely want to take a look at. So, no cash advances because you’re getting hammered on the interest rate, pay my balance by the due date and I avoid interest. So, let’s go back to practical advice then; what are some ways then to avoid credit card debt? Because it’s not the credit cards that are the problem, it’s the debt that’s the problem. So what advice have you got on that?

Diane Cunha:    Well, I think that, first thing is you should automate your payments. I think we talked about this. So if you pay every – every time you get paid – I think you have a You Tube video about this.

Doug Hoyes:    Oh I’m sure I do. You Tube, you can do a search for it there. We’ll put a link if we can –

Diane Cunha:    Budget without budgeting?

Doug Hoyes:    There you go, yes, that’s an excellent video. So we will put a link in the show notes on the video for that.

Diane Cunha:    So essentially you know roughly how much – like I said, I’ll go back to the gas example; so if someone says “You know what, I get paid semi-monthly.” Okay, so you get paid twice a month. So you fill up your tank two times before the pay period, so you owe a hundred bucks. Pay every single time you get paid, automate that so you pay $100 on your credit card. That is the easiest way to avoid any extra charges and in that way, like I said, out of sight, out of mind. You know it’s getting paid, everything is up to date and I mean, like I said, gas is the easiest thing to use an example because it’s give or take $5 here or there depending on the price. So automate your payments; that is a huge, huge way to start paying off your balance in full. An easy way to do it.

Doug Hoyes:    And so conceptually how you do that is you say “Well, okay, I know I’m putting 50 bucks a week in my car. So I get paid every two weeks so every two weeks on payday I’ll just automatically program it to put a hundred bucks on my credit card.

Diane Cunha:    Right.

Doug Hoyes:    Boom, don’t have to worry about it. Okay, and like you say, that way you’re automatically making payments, you don’t have to worry about it. Obviously with a credit card you’re still going to want to look at your statement to make sure that “Okay, I’m paying enough. I bought some other stuff or whatever” but automating it gets a big chunk of the payments out of the way.

Diane Cunha:    That’s right.

Doug Hoyes:    Okay, so tip number 1; automate your payments. Give me some more.

Diane Cunha:    Second one is make a lot of small payments. So if you by chance are carrying a balance, you carry a balance over, there’s some interest there. Make anything you can towards that because that will help bring down the interest charges. You know, a mistake a lot of people do that I’ve seen, you know, they come in, they show me their credit card statements and they’re making $500 payments or $600 payments and I say to them “You probably ended up using that credit card again because you gave more that what you could afford.” So I mean, if you get into a situation where you do have a large balance, make small payments, chip away at it and make affordable payments because at the end of the day it’s counterproductive to put money towards it and then you use it again for groceries. So making small payments is a big key.

Doug Hoyes:    Okay, and then you already talked about this; what’s your stance on minimum payments. That’s cool, we’re good?

Diane Cunha:    No. Bad, bad, bad.

Doug Hoyes:    No, that’s not cool. Not good.

Diane Cunha:    You don’t want to just make minimum payments; again, that’s what gets you into the trap. When people come in again for their sessions, I say “On that credit card statement you should be seeing ‘minimum payment $10.’ You see the $10 is 3% of their balance; that’s how credit cards work. So you know you’ve paid off a full balance if you owe $10. That’s just the minimum of what they require and that shows there is no interest. There’s no interest owing on that credit card from your previous balance.

Doug Hoyes:    Yeah, but you want to be paying a lot more than that obviously because that’s the only way you’re ever going to . . .

Diane Cunha:    That’s right. You want to see where it says – I mean they bold that ‘minimum payment due 10 bucks.’ Well sure $10 and at the full balance we’ll yeah, pay off that full so that every single month the listed amount would be $10.

Doug Hoyes:    Yeah, the $10 minimum payment is the payment you make so that the bank earns the maximum amount of interest.

Diane Cunha:    Correct.

Doug Hoyes:    That’s really what it should say.

Diane Cunha:    That’s exactly what it is.

Doug Hoyes:    It shouldn’t say minimum payment; it should say maximise the bank’s profit.

Diane Cunha:    Hm-mm.

Doug Hoyes:    Okay, so we’ve talked about payments, interest periods, all that sort of thing; do you have any thoughts on the type of credit card I should be getting?

Diane Cunha:    Yeah, it’s tough because I see people on their credit counselling sessions and I say “What’s your two-year goal? What’s your five-year goal?” because everyone’s different. Not everyone wants to buy a house, not everybody wants to travel. So the type of rewards that are out there – I tell them, I say “What do you like? Do you like Canadian Tire? Go to Canadian Tire, get the rewards. Do you like this store? Get the rewards, get the travel.” Maybe people don’t want to travel but I mean – the rewards I can’t really say which one’s best, it’s what’s best for you. So there’s the risk though that people have that mentality of carrying a balance when they have those rewards so they think “Okay, I’m going to get these grocery points, I’m going to get these rewards.” I did see a lady once and I saw her for a consultation and I said “You know what, you know, proposals probably the best option” she agreed and she was worried about losing her $100 in grocery money. And I said “Well, you’ve paid more than that in interest.” Her interest alone was over $200 a month. So it’s that illusion that it’s like “Wow, I’m getting something for free.” Well, you’re not.

Doug Hoyes:    You pay $200 a month so that you could earn over a period of six months, a hundred bucks.

Diane Cunha:    Exactly.

Doug Hoyes:    It just makes no sense.

Diane Cunha:    Right.

Doug Hoyes:    Now, you addressed the issue of rebuilding; and so someone comes in, they see us, they file a bankruptcy or consumer proposal, they don’t have any credit cards, they want to start re-establishing. So one of the ways to do that is with a secured credit card because you almost for sure qualify for a secured credit card even though you’ve gone through a bankruptcy or proposal. So what is a secured credit card, how do they work?

Diane Cunha:    So secured credit cards are – basically it’s a deposit. You pay a deposit to a credit card company, you say “Listen, you know –” They look at numbers, they don’t care that you had a relationship breakdown, that you have mental health, that something happened in your family – they don’t care. It’s all about money and risk. You are high risk because your credit’s not good. So, what they say is “Give us $300. We’re going to put this 300 into an account, we’re going to leave it there and we’ll give you a credit card for 300.” You have to build that trust so if you don’t pay your balance, they’ll take that 300 and close off your card and they’re not out any money. So essentially it’s putting a deposit down and protecting themselves because they don’t know you and they don’t really care.

Doug Hoyes:    Yeah, they’ve covered their risk so they’ve got their security sitting there. So obviously that’s a way to, you know, begin to establish credit and begin to improve your credit score and, you know, everybody who listens to this podcast knows I’m not a big fan of people focusing on their credit scores. I mean again, you know, chapter 4 of the book, I talk about credit scores being for the benefit of the lender, they’re not for your benefit. But, I get it; if you’ve gone through a bankruptcy or proposal and “In the future I want to finance a car, I want to buy a house. Well I need to begin to establish credit so I’ll be able to borrow money in the future at reasonable rates.” So, let’s end the show by having you give us some practical advice on rebuilding your credit score by using credit cards.

Diane Cunha:    So again, two major things everyone should remember; one, make sure you can handle the credit which means pay off your balance every single month. This is what I stress every session that people – you know, when people come in for proposals or bankruptcies and they say “How do I rebuild my credit?” and I say “Well, do you have money? Do you have savings for it? Save money first then get a credit card because then you’re not in the habit of relying on the credit card. You won’t have that ‘just in case’ type attitude of using the credit card for emergencies.” So pay off the balance, pay it off each month.

Doug Hoyes:    Well, and having that cash in reserve means I don’t need to be relying on the credit card then.

Diane Cunha:    That’s right.

Doug Hoyes:    So I need a new pair of boots. Okay, in the past it would be ‘put it on my credit card’ now it’s ‘no, no; I’ve got the cash sitting there I don’t have to resort to the credit card.’ I get into the habit of having cash sitting there. And ultimately, if you want to rebuild and be in better shape in the future, that’s the way you’ve got to do it. It’s relying on cash and your own savings rather than relying on credit cards is the trick.

Diane Cunha:    Yeah, and also proving that you don’t need all your credit. Again, the people that we see and the people that we help, you know, I say to them “Did you go to your bank? Did you see if the bank would help you?” Well, the banks don’t want to see you use your maximum. You have a $15 000 Visa and it’s maxed out at 14, $15 000; that scares them. So be careful how much you put on that card because at the end of the day when you need that help the bank is not going to help you.

Doug Hoyes:    Yeah, your credit score will be better if you are utilizing a smaller percentage, not a bigger percentage. If you’re maxed out all the time, then your credit score is going to be hurt.

Diane Cunha:    Yeah, so if you have a big limit, that’s fine, just make sure you pay off what you use in full.

Doug Hoyes:    Excellent. Diane that’s great practical advice. Thanks for being here.

Diane Cunha:    Thank you for having me.

Doug Hoyes:    So let me emphasize once again that there are lots of people who survive quite well without credit cards. They use their Visa debit card to make online purchases and book hotel rooms and buy stuff; so credit cards are not essential. However, I get it; they’re convenient, they do have advantages. You just need to be smart and do everything in your power to avoid credit card debt. That’s our show for today. Full show notes including a transcript and links to everything we talked about today and a link to the video of this podcast on our Debt Free in 30 channel on You Tube can be found at Hoyes.com. That’s H-O-Y-E-S .com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

The post What to Know About Credit Cards So You Use Credit Wisely appeared first on Hoyes, Michalos & Associates Inc..

The problem with waiting until the bill arrives to pay off a credit card charge or make a payment is that, unless you’ve budgeted wisely, you may not have the money to pay off the debt when the bill arrives. And let’s face it, most people don’t like to budget.  That’s why I recommend that the best way to avoid accumulating debt in the first place is to pay your bills whenever you get paid.  If you get paid weekly, make a small micropayment towards your balances every week.

If you carry balances, making small weekly payments can help you pay off your debts much sooner, here’s why:

1. You will avoid late fees. If you make small regular payments each month, you are less likely to miss a payment which means no late fees. Late fees can range between $25 and $40 which can be the equivalent of one extra small payment alone.
2. It’s easier to make extra payments. By paying weekly, you make 52 small payments instead of 12 larger payments. Not only is this easier to manage financially, but you’ll make one extra ‘free’ payment by the end of the year. Let’s say, for example, you want to pay $400 a month towards your credit card debt, that adds up to $4,800 a year. If you pay $100 a week, you end up paying $5,200 against your credit card debt. That’s one extra monthly payment.
3. You pay less interest. Credit card companies charge interest on your average daily balance. Making small payments more often puts the benefit of compound interest to work for you, instead of against you.  Every time you make a payment your balance declines and the daily interest charged on that balance falls as well. The quicker your balances decline, the lower your overall interest costs. This saves you money and helps you pay off your credit card debts sooner.
4. Your balances fall faster. More payments and less interest mean you will reach a zero balance on your card much earlier. Once you do, continue to make small payments towards any new charges, so you avoid accumulating new debt in the future.
5. When cash flow is tight it keeps balances under control. If you hit a period where your income has dropped for any reason, making small payments throughout the month based on what cash you have available can be a good way to help keep your balances as low as possible until you can go back to making larger payments. Again, the earlier you pay off your balances, the less interest you pay, reducing your balances down the road.  Interest on interest is what causes credit card debt to balloon very quickly.
6. Your credit score improves.  The higher your credit balances as a percentage of your credit limit, the lower your credit score. To have a good credit score, you never want your balances to exceed 50% of your credit limit on any day of the month. If you can keep your balances no higher than 35% that’s even better for your score. Making small payments keeps your balance low all month, lowers your credit utilization rate, and improves your score. A higher score can help you qualify for lower interest rates, saving you money and helping you pay down debt faster.

Making Micropayments Easier

Some other tips that can help you set up a plan to micro-manage your debt repayment:

• Try to pay at least the minimum payment twice a month. Of course, pay more if you can.
• Use online banking to set up multiple payments. Most credit card companies allow you to make unlimited payments, however, always check your credit card company for any limitations.
• Take advantage of any windfalls. If you receive a bonus, a birthday gift or even win a small amount on the lottery, put all or a portion of that towards debt repayment right away. No need to wait for your next due date.

Read more: How to Pay Credit Cards – Pay More Than The Minimum

Can multiple payments help your credit score?  Making extra payments does not, by itself, improve your credit score. However by making additional payments you help you credit history by avoiding late payment notices, and lowering your balances means you are using up less of your credit limit which can increase your overall score.

Is it bad to pay credit cards before the due date? It is OK to make a payment before the statement due date, in fact, you should always make at least the minimum payment owing on your credit card before it is due. Making early payments can help avoid the risk that your credit card company won’t process your payment on time which can result in a late payment charge and lower your credit score.

The post The Benefits of Making Small Micropayments Towards Debt appeared first on Hoyes, Michalos & Associates Inc..

My average client doesn’t just have one credit card; they owe money on more than three of them when they file for debt relief.

Every credit card is different, but a minimum payment is typically 3% of the outstanding balance, plus interest payments and fees for that month. While it may be tempting to just make the minimum payments on your credit card debt, it’s actually much more harmful in the long-run because only part of the payment you make goes towards the actual principal. The rest goes to interest, so it takes a very long time to pay off your balance in full.

Consider the following example:

Say you owe $3000 in credit card debt at 20% interest. A 3% minimum payment of the balance would be $90. Your interest rate charge will cost you an additional $50 a month ($3000 x 20% / 12 months). So, you would pay a total of $140 in the first month towards your debt – part of it to the principal, part of it to interest. This would be re-calculated every month until you’re debt free.

The result? It would take you over 17 years to be debt free and you will have paid over $3000 in interest alone. So, you can see why only making minimum payments hurts your finances.

If you want to eliminate credit card debt you must pay significantly more than the minimum balance each month.

Read Transcript

Carrying a balance also impacts your credit utilization, which impacts your credit score, which may make it more difficult to borrow for something like a mortgage or a car loan.

While it would be ideal to pay more than the minimum, or better yet, not have a balance at all, I understand that for some people, that can’t be the case.

So, what’s a typical solution if you’re feeling overwhelmed or you can’t pay your credit card debt? For the majority of my clients, it’s a consumer proposal. It’s a more affordable monthly repayment plan and lasts up to five years maximum, regardless of the amount you owe.

To learn more about paying down your credit card debt and how a consumer proposal can help you become debt free, listen to our podcast.

Resources Mentioned in the Show

• Information that must be disclosed on your credit card statement
• Canada.ca – Pay Off Credit Cards

FULL TRANSCRIPT – SHOW #177 & #205 Minimum Payments on Credit Cards are Keeping You in Debt

Originally aired January 20th, 2018; Rebroadcast as part of Best Of Show August 4, 2018.

Doug Hoyes: Today I’ve got a short “technical tidbits” edition of Debt Free in 30 for you.

I want to talk about the most common form of debt in Canada, and that’s credit cards, and I want to explain why only making your minimum payments is keeping you in debt.

About 90% of people who file a bankruptcy or a consumer proposal in Canada have a credit card, and my average client doesn’t just have one credit card; they owe money on more than three of them when they file for debt relief with my firm, Hoyes Michalos.

Credit cards are about a third of their total debt, and my typical client owes over $16,000 in credit card debt.  That may not sound like much, and that’s down from over $20,000 a few years ago, but that’s because we now owe more on personal loans and other forms of debt like mortgages and car loans.

So what’s the problem with credit cards?

If you pay your credit card balances in full each month, there’s no problem.  They’re great.  You don’t have to carry cash, you can earn points, and at the end of the month you’ve got a complete list of all of your spending, that you can download to a spreadsheet, or a budget, or an app.  It’s wonderful.

The problem, of course, is if you don’t pay your balance in full every month. And if you only pay what the credit card tells you is the required minimum payment, you’ve got a huge problem.

Here’s the way credit cards work:

You go to the store and make a purchase.  By law, you get an interest free grace period of at least 21 days, so if you pay your balance in full by the due date, you pay no interest.  That’s pretty cool.  You just borrowed money for at least 21 days for free!

Now let me stop here and mention that the 21-day interest free grace period only applies to purchases; it does not apply to cash advances, so if you take a cash advance on your credit card you are paying interest immediately; there is no grace period.

But what happens if you only make your minimum payment?  Not surprisingly, you start paying interest. Keep paying the minimum and you keep paying interest.

So what is a minimum payment?  How does the credit card company figure out your minimum payment?

Each credit card is different, but a typical minimum payment will be 3% of the outstanding balance, plus interest payments and fees for that month.

Let’s say you owe $1,000 on your credit card.  Let’s assume the interest rate is 20%, just to keep the math easy.  That means the interest on $1,000 for a month is $200 divided by 12 months or $16.67 for one month.  Your minimum monthly payment could be 3% of the balance, so that’s $30, plus the interest, for a total required payment of $46.67.

So you paid your credit card company $47 but your balance only fell by $30. That’s why if you only make your minimum payment, it can easily take a dozen years, or more, to pay off your credit card.

Here’s an example: you make a purchase of $10,000, the interest rate is 19.99%, and the minimum payment on your credit card is 3% of the balance plus interest, or a minimum of $10.  At that rate it will take you almost 13 years to pay off your credit card, and you will pay almost $5,000 in interest!

That means that that those things you bought for $10,000 end up costing you $15,000!

Carrying a balance also impacts your credit utilization, which impacts your credit score, which may make it more difficult to borrow for something like a mortgage or a car loan.

That’s another reason why only making the minimum payment on your credit card is deadly.

The interest rates and minimum payments on credit cards vary a lot. So how do you know the deal on your own credit card?

Read your monthly statement.

As of September, 2010, the law says that banks and other federally regulated financial institutions must disclose on your monthly statement your minimum payment, and they must show an estimate on your credit card statement of how long it will take to pay your balance if you only make minimum payments.

So you don’t have to guess, and you don’t have to do any fancy math.  It’s all right there on your credit card statement.  The law says that your monthly statement must include the following information:

• your outstanding balance (you have to pay this amount in full by the due date to benefit from the interest-free grace period on new purchases)
• an estimate of the length of time it would take to pay off the balance in full if you paid only the minimum amount required each month
• a description of each transaction made during the period covered by the statement, and the amount charged, including interest
• the date each transaction was posted to your account
• the amount credited or charged during that month for each of the following:
  • purchases made
  • cash advances received
  • payments made
  • interest charged
  • non-interest fees charged.

Here’s my advice:

At least once a month, read your credit card statement in detail.

Start by looking at the box that says how long it will take to pay off your balance in full if you only make your minimum payments.  That should scare you.

Then look at the charges.  Obviously every purchase you have made will show up, but you should pay very close attention to the interest charged and the non-interest fees charged.

Interest charges are expensive, but the non-interest fees can be a killer.  Credit card companies have all sorts of fees they can charge you, and that’s where they make a lot of money.

They will charge you a fee if you bounce a payment or have an NSF cheque.  That fee can be $50.  In my previous example where you had a $1,000 balance and had a monthly payment of $47, it’s a real killer if they also add to that a $50 NSF fee.  That one charge could double your monthly payment!

They also have fees if you are over your limit.  If you have a $1,000 limit, and they charge you interest so now you owe more than $1,000, they could charge you an over limit fee.  That could be another $50!

You can see how those non-interest fees can add up, so watch them carefully.

Once a month you should look at your statement, the actual printed statement.  I get my statements electronically, but I can go to my credit card companies’ website and download a pdf copy, and it shows things like how long it will take to pay off my balance in full if I only make my minimum payment, so that’s important.

But, I don’t only look at my statement once a month.  I go online and review my transactions every few days, at least twice a week.

Why?

Because credit cards can get hacked, and if someone else is using my credit card, I want to know about it immediately.

It’s happened to me more than once.

The last time it happened I looked at my statement and saw that I had taken a taxi ride in Toronto yesterday, except that I was not in Toronto yesterday, and I’ve never paid for a taxi ride with a credit card in my life.  So, I immediately called my credit card company, they reversed the fraud charges, cancelled my old card, and sent me a new one.  It was an inconvenience, but it would have been far worse if I hadn’t noticed the fraud for a month, by which time they had used up my entire credit limit, which is a problem if I was trying to put gas in my car.

My point is: check your statement very frequently.

So you get it.

Now you understand why only making your minimum payment is keeping you in debt.

You want to pay more than the minimum payment. But what if you can’t.

I understand.

My average client earns less than $2,400 per month.  Their unsecured debt, for things like credit cards and bank loans, is around $50,000, so even if their interest rates are only 10%, that’s over $400 in interest alone each month.  If you add in a minimum payment of 3% on credit card balances, and paying some of the principal on other loans, it’s easy to see why many of my clients can’t even make their minimum payments.

They try for a while.  They take a cash advance from one credit card to make their payment on another card, but obviously that just increases their debt each month, and eventually they hit their borrowing limit and can’t do it any more.

So what’s the solution?

For the majority of my clients, the solution is a consumer proposal.

If you have $50,000 in debt, the minimum payments can easily be $2,000 a month.  That’s an impossible payment for many people to make.

In a typical consumer proposal for someone with $50,000 in debt, we can often negotiate a payment of $250 or $300 per month.

That’s a lot less than $2,000 per month!

In a typical case the credit cards and other debts you owe money to will accept a consumer proposal where you pay $300 per month for 5 years, or $18,000 in total.

You pay $18,000, and you get rid of $50,000 in debt.

And that $18,000 includes everything.  That includes our fees to administer the consumer proposal (and our fees are set by the government, so all licensed insolvency trustees get the same fee for the same size proposal), that includes all government fees, HST, everything.

That’s why consumer proposals have become so popular.

If your choice is between paying $2,000 per month just to cover your monthly payments, or paying $300 per month to eliminate your debt, it’s an easy choice.

But wait, what about my credit?  If I do a proposal I won’t ever be able to borrow again!

No, that’s not true.  First, if you can’t make your minimum payments now, your credit is already damaged.  If you could go out and borrow $50,000 at a 3% interest rate to pay off your high interest rate credit cards you would have already done it.  That’s why you are considering a consumer proposal.

Second, once the proposal is finished you have no debt, so it’s relatively easy to rebuild your credit and get back on track.

So to summarize: if all you are doing is making your minimum payments, you will be in debt for a very long time.

If you owe a lot of credit card debt you need a better solution, which for many people is a consumer proposal.

That’s our show for today.

Full show notes, including a full transcript and links to the government rules on credit cards, and links to how a consumer proposal works, can be found at hoyes.com, that’s hoyes.com

Thanks for listening.

Until next week, I’m Doug Hoyes, that was Debt Free in 30.

The post Minimum Payments on Credit Cards are Keeping You in Debt appeared first on Hoyes, Michalos & Associates Inc..

Rafael Lourenco is the Executive Vice-President for ClearSale. ClearSale focuses on credit card fraud prevention for online stores. The company operates globally and Rafael says that although Canada has implemented more modern technology when it comes to card security, this advancement increases risk in a different area: card-not-present purchases.

“Card-not-present fraud” means exactly what the term says. It’s theft that impacts retailers online or over the phone, where the physical credit card isn’t present and the process of punching in a PIN doesn’t take place. According to Rafael, it’s a huge problem: An average North American merchant loses on average 0.9%, meaning 90 basis points of its revenues in chargebacks and fraudulent losses. That may sound like a small percentage, but retailers tend to only have margins from 4 to 8%. So, if they’re losing 1% out of 4 or 5, you’re looking at a 10% loss of profit just from fraud.

To counter this problem, retailers then implement stricter measures online, which can create a negative customer experience by blocking some orders they think are fraudulent. Unfortunately when they do that, eventually they won’t do it properly and they will block transactions that shouldn’t be blocked.

Retailer face two issues that can increase fraud risk for consumers:

• Lack of information: Retailers don’t like to make their customers complete many forms before making an online purchase because the experience should be fast and simple. But, the absense of more detailed information about you and your card makes it harder to verify that an online purchase is being made by the actual cardholder. Take for example the one-click buy approached used on a lot of commerce websites. Your credit card is loaded on the website, you don’t need to type it again, or to type the three digit CVV security code. This is easier for you but anybody that hacks your account online will have instant access to your credit card without having to provide this information either.

• Data breaches: Hackers gain access to data when large breaches occur the Equifax hack. When a fraudster has access to a combination of details, like a credit card and an address, or an email and phone number, then it’s much easier for them to pretend to be somebody else. Essentially, it’s identity theft and merchants face challenges in preventing these transactions, as they appear real.

ClearSale’s technology helps detect and prevent these types of fraudulent transactions by sending verification calls to customers to confirm that they made a purchase.

How can consumers help prevent credit card fraud?

While ClearSale focuses solely on helping merchants, Rafael believes that there are measures Canadians can take to help prevent fraud and improve overall fraud detection systems too:

1. Never give out your credit card information – not even to family. If you want your son or daughter to use your credit card, it’s best to make them a secondary credit card holder. This way, they’ll have their own number and spending limit.
2. Answer verification calls. You may receive a call on behalf of a store confirming your purchase activity. Rafael suggests taking these calls and confirming whether or not you made a purchase. He stresses that these are always only yes or no questions and that you should not volunteer any extra information yourself or be asked to do so.
3. Let retailers know when your transaction is declined. If you do make a purchase online and your transaction is declined, Rafael suggests contacting the merchant to let them know it happened. This allows retailers who may have setup more stringent security improve their own internal systems so that other, legitimate purchases aren’t also blocked.

For more details on how both consumers and businesses can protect themselves from hackers and fraudulent activity, tune in to today’s podcast or read the complete transcript below.

Resources Mentioned in the Show

• Tips to Protect Yourself From Identity Theft and Fraud with Kelley Keehn
• Clear.Sale website

FULL TRANSCRIPT – SHOW 186 Why It’s Difficult to Prevent Online Fraud

Doug Hoyes:   Over the years, I’ve had many clients who got into debt as a result of fraud. In many cases it was preventable. They lent their credit card to someone and gave them their PIN, and that person used their card and didn’t pay them back. Unfortunately, if you give away your PIN the bank won’t cover your losses. We’ve talked about that before on this show, including with Kelley Keehn back on show number 75, so I’ll put a link in the show notes to that podcast so you can go back and listen to it if you missed it.

But what happens when I don’t give my card to someone and fraud still happens? Today in Canada our credit cards have chips, so fraud at the store is much less likely than it was in the past, but what happens when you use your card to make an online purchase?

If I’m buying something at an online retailer, I don’t use my chip. I just type in my card number and other information. And that’s one reason why online fraud is more common than fraud at a store. It’s called card-not-present fraud, because of course the physical credit card and the chip is not present for that transaction.

So other than the fact that you don’t use the chip on your card when you make an online payment, why is it so hard to prevent online credit card fraud? How do merchants protect themselves? More importantly, what can you do to protect yourself when you’re making purchases online?

Those are the questions I have for my guest today, so let’s get started. Who are you? And who do you work for?

Rafael Lourenco:     I’m Rafael Lourenco. I am the Executive Vice President for ClearSale. And ClearSale does fraud prevention for card-not-present transactions, meaning that we avoid, we stop fraud before it happens, for transactions done mainly online, mainly with situations in which somebody’s buying but is not present on the process of buying. So companies like Wal-Mart, Sony, Chanel and a bunch of others are our customers, and we help them with this process of preventing from fraud.

Doug Hoyes:            And card-not-present is exactly what it sounds like. If I go to a bricks-and-mortar merchant with my card, I put it in the machine, I punch in my PIN. But if I’m buying something online, which is what you’re talking about, obviously my card is not present; I can’t punch it in. That’s what you’re talking about with card not present, is that right?

Rafael Lourenco:     Correct, correct. So the biggest difference between these two scenarios that you just described is the financial liability, right. So when it comes to transactions in brick and mortars, or card-present transactions as we like to describe, this financial liability for eventually a transaction that is not recognized by the cardholder is on the bank’s or the card issuer’s side.

While, when you’re talking about a card-not-present transaction, which is mainly online or modal or phone orders, then the financial liability, meaning the company responsible for paying the reimbursement that the customer is owed, is the merchant, so the company or whoever it was that let the transaction go through.

Doug Hoyes:            And so as a consumer, do I even care then? So I mean if it’s the bank’s problem, then what do I care? Is this something that as an individual consumer I need to worry about?

Rafael Lourenco:     Okay, so there’s a few optics. Obviously when you have your credit card involved in a fraud, there will be different levels of how easy it is to get your money back, right. So you’re going to call your card issuer as a consumer if you see a transaction on your invoice that you don’t recognize.

And if that’s a card-not-present transaction, it tends to be easier for you to get your money back. And the reason why is that the company you’re calling to, which usually is the bank, is not responsible financially for that fraudulent order. So they will probably only let you go and give your money back, and then ask for this money back from the merchant.

However, it doesn’t mean that it’s 100% seamless for you this process, because obviously you have to issue another credit card. Probably your credit card number and very likely other personal information about yourself is being used by a fraudster, so ultimately you are being involved in a crime.

So I’d say that financially speaking, in the super short term, yes, you shouldn’t care that much. But obviously, conceptually speaking, I’d say there is a lot more involved in a situation like that that you should be aware of as a consumer.

Doug Hoyes:            Yeah, so even though I may not suffer a financial loss, it’s still a huge pain in the butt. I’ve got to get a new card, go through all the hassles so, you know, re-set up all my preauthorized payments, whatever. So it’s something as a consumer…

Rafael Lourenco:     Yeah, correct.

Doug Hoyes:            I want to be aware of as well. So how big a problem is fraud, and specifically the kind of fraud that you’re dealing with, you know, card-not-present fraud? How big a problem is it?

Rafael Lourenco:     Yeah, it’s a huge problem, and mainly it’s a growing problem, right. And it involves many aspects of a business as well as a consumer’s point of view.

In the business point of view, you’re talking about mainly two losses, two sources of losses for a business. The first one mainly, and more obvious in the first layer, is the losses with fraud. So an average North American merchant loses on average 0.9%, meaning 90 basis points of its revenues in chargebacks, in fraudulent losses, right. So it’s a little less than 1%.

But if you look at this on the point of view of – it sounds like a small percentage, but if you look at it at a point of view of the margins, retailers tend to have margins from 4 to 8%. It’s not a big-margin business. So if you’re losing 0.9 out of a margin of 4 or 5%, you’re talking about more than 10% of your margins going away with fraud, with a specific type of loss, right. And that’s a big problem.

Secondly, what could be actually a bigger problem than that is many retailers will be afraid of losing this amount of money, and eventually will implement systems, rules, policies, whatever to block some orders to avoid this cost to happen. And when they do that, eventually they won’t do it properly and they will block transactions that shouldn’t be blocked. So somebody as a consumer may have been declined by a certain merchant because they implemented a system that is very conservative, and that’s a much bigger problem.

So talking about the United States for example, there are some researches that say that it’s a $9 billion problem, the problem of fraudulent chargebacks. While, if you talk about false declines that are those orders that should be approved but weren’t because of a fear of fraud, it’s a problem of $113 billion in potential revenue that is blocked, that didn’t really happen as revenue. So, mainly those are the two biggest problems on a merchant’s point of view.

Doug Hoyes:            Yeah, and obviously that’s annoying for me as a consumer, if I’m placing an order online and all of a sudden it gets blocked for some reason I don’t even know what the reason is, and I’m all upset and now I don’t like the retailer and I’ve got to go somewhere else. So obviously it’s a problem for everyone. So why is it then that it is so difficult to prevent this type of fraud?

Rafael Lourenco:     Well yeah, first you’re completely right. As a consumer, 34% of the consumers in the recent research report that they would never buy again in this merchant if a credit card is declined, especially because many consumers won’t have a clear view of why the transaction was declined and eventually will relate it to a credit issue, or to something that the merchant believes the person can’t pay or is not good enough for the merchant. So the feeling is not really good on the consumer.

Doug Hoyes:            What percentage did you say?

Rafael Lourenco:     Thirty-four percent report that will…

Doug Hoyes:            Thirty-four percent.

Rafael Lourenco:     Yeah, will never buy again. And another 32% report that would reduce their usage of credit card in this particular merchant. So, more than 60% of them will make some different behaviour after that happens.

Doug Hoyes:            Yeah and I can certainly understand that because, so I go online, I try to purchase something and all it says is declined, it doesn’t give me a whole reason for it. And so I’m thinking ‘Oh boy’, you know my credit’s bad or they think my credit’s bad.

So it’s annoying for me as a consumer, it’s upsetting, but yeah, now I’m really mad at the retailer, because who else can I be mad at. Or maybe I’m mad at my bank as well. But it’s a problem. And as a result, I can see ‘Okay, I’m not going back to that retailer.’ So it’s obviously a huge problem, so why is it so difficult to prevent this kind of fraud?

Rafael Lourenco:     Well, I think there are two main sources of reasons why it’s hard to prevent from this type of fraud. First is that, as time goes, as the technologies are developed, the merchants and the providers, just like ClearSale, they count with less and less information in that moment, right, because people are less and less likely to share information on a certain purchase.

So think of the purchases doing through your cell phone. You don’t want to fill like dozens of forms, or you don’t want to share a lot of information about yourself. You just want to buy something online. Sometimes you’re buying something through an app on your cell phone, and you don’t even want to type. It’s hard to type everything up.

So merchants are requiring less and less information from the consumers. And that’s a trend that I wouldn’t doubt, I wouldn’t fight against it, because everybody’s willing to make a purchase the easiest they can. So that they can sell more and the consumers can have a more convenient way of buying. So the absence of information is one of the sources of how – one of the reasons why it’s so hard.

On the flipside of that, you have the fraudsters also involving when it comes to their techniques. So the data breaches, for instance, are an important piece of this puzzle. So once Equifax or Target or any of those famous data breaches that happened in the recent years happen, then basically your data or the data of a big number of consumers is out there waiting for being used by someone, right.

So when a fraudster has access to a combination, for instance, of a credit card and an address, or an email address and phone number, then it’s much easier for the fraudsters to pretend to be somebody else. Because at the end of the day, when we are talking about this type of fraud, we are talking about identity theft, right. The fraudsters usually won’t use their own credit card obviously; they will use somebody else’s. And the data breach, as I said, is an important part of that because it’s easier from a fraudster point of view.

In a fraudster point of view it’s easier to access a combination of data, and therefore it’s easy to pretend to be somebody else. So if I have your name, your shipping address, your email address, then I just have to fill those items and I’m going to be pretending to be yourself, and it’s going to be hard for the merchant to avoid that or to understand that order as suspicious, because everything is matching.

Doug Hoyes:            Yeah, and I hadn’t really thought about that but you’re right, a lot of people now are buying things on their phone. It’s not like I’m going on my desktop computer and I’ve got lots of time to fill in all the different forms and everything. And the reason I’m doing it on my phone, obviously, it’s way easier; it’s an ease of use.

Do you think we’ve sacrificed some security for ease of use to make it easier, where there’s only one or two buttons I click now and now many? Is that a problem that we’ve got now, we’ve traded security for ease of use?

Rafael Lourenco:     I’d say that depends on your point of view, right. If you’re a merchant and you want to sell more, then obviously it’s a trade off that you may want to take. But at the end of the day, yes, you’re right. Like the less information you ask the harder it is to prevent from some type of fraud, so the more you need technology suppliers or whatever to develop and to design a fraud-prevention strategy that accommodates this new scenario.

But yeah, it’s two sides of the same coin. So I’d say that somehow some merchants may have sacrificed the security in the name of ease of use. For instance, the one-click buy is the perfect example. So when your credit card is loaded on the website, already loaded, and you don’t even need to type it again, or to type the security three digits, the CVV as they call, anybody that hacks your account online will have instant access to your credit card. So the one-click buy is the perfect example of something that makes your life much easier as a consumer, but opens a new opportunity for fraudsters.

Doug Hoyes:            And I want to come back to that but I also want to ask you then, is fraud more common with eCommerce transactions than with a normal bricks-and-mortar store. I mean obviously there’s no such thing as one-click buy when I’m standing at a cashier. Is it more secure in a bricks-and-mortar store? Or is it about the same?

Rafael Lourenco:     I’d say percentage wise, yes, the card not present is riskier, and especially in countries or regions or merchants that adopted the chip and PIN code for the orders, because it’s much harder to duplicate a credit card with a chip and understand or figure out what’s the PIN code, the password, versus just knowing the 16 numbers of a credit card and expiration date that basically is what is required for card-not-present fraud. So yeah, I’d say that card-not-present orders are riskier.

Doug Hoyes:            Now your company, ClearSale, operates across the world, right? You’re based in the United States, but as a Canadian, if I’m purchasing something online there’s a very good chance that your software, your program is being used by the retailer I’m using. Is that correct?

Rafael Lourenco:     Correct, yeah.

Doug Hoyes:            Okay, so what differences do you notice between Canadians and Americans? Is fraud more prevalent in one country over the other? Are there any differences in patterns that you see in Canada as compared to the United States?

Rafael Lourenco:     Mm-hmm, so good question. I think they differ in a number of dimensions let’s say. But the most important one, or the one that I think is easier to understand or to realize is that Canada’s difference from the U.S. has been using the technology of chip and PIN for a longer time compared to the U.S.

So October 2015 was the initial date in which the transactions with no chip in the brick and mortar were initiated to be on the merchant’s responsibility instead of on the bank’s responsibility for the card-present orders, for the card-present transactions in the United States. So I think the number one difference between the countries is that.

I mean when you’re talking about card-present orders, Canadians are much more used to the chip and PIN, which is let’s say a more modern technology comparing to the magnetic that the Americans are used to. And this scenario has consequences to the card-not-present orders, and the main consequence is that the Canadian market is a little riskier comparing to the American market. And that’s a fact that eventually you wouldn’t expect because of other reasons.

Doug Hoyes:            Yeah, I mean that sounds crazy to me because, okay, so we’re more likely in Canada to be using the chip and the PIN. And I know that for a fact because every place I go you put your card in, you punch in the code. And we’ve been using it for a lot longer than the U.S. You said it was only October 2015 that the responsibility switched to the merchant, so they’re obviously a little more proactive now. So if we have better security and have been using it longer, why is Canada riskier for or more likely to be subject to these kind of fraudulent transactions?

Rafael Lourenco:     Yeah, the thing is, when you make it harder for a fraudster to make a fraud in a card-present transaction, you kind of push those people because they are kind of professionals, right. They take their money from these fraudulent activities. So they will go more to the card-not-present orders.

So when I say that Canada is riskier, what I mean by that is that on card-not-present orders there will be more fraud in Canada comparing to the U.S. And my theory is that one of the reasons is the fact that the chip and PIN is more adopted, so therefore it’s harder to make a fraud in the card-present orders. So that’s why I think for card-not-present orders Canada’s is a riskier market than the U.S.

Doug Hoyes:            And it’s just because if I’m a fraudster I know that well, I don’t have a whole of hope of replicating a card, because I can’t replicate the chip and the PIN and everything, so I’m not going to put any effort into that. I will put all my effort into the card-not-present type of fraud, in other words online transactions and things like that. So it’s not that there’s any difference in the technology for card-not-present when it comes to Canada or the U.S…

Rafael Lourenco:     No.

Doug Hoyes:            It’s just that that’s where… And again, this is your theory. Obviously you’re not a fraudster so you don’t know for sure, but your theory is that that’s where they’re devoting all their attention, and that’s why it’s slightly more risky here in Canada than the U.S.

Rafael Lourenco:     Correct. There’s another small difference between those two countries that I may mention that is the likelihood to be a victim of international fraud. So when it comes to our customers, and we have several customers out of Canada and another good number out of the United States, you will see a larger attack or a larger percentage of fraud attempts coming from other countries besides the original country of the merchant in the U.S. versus Canada.

What I mean by that is that perhaps the U.S. merchants are more likely to be targeted by international fraudsters than a Canadian customer, which kind of balances with the other difference that I mentioned on the technology side. So both of them are targeted by international fraudsters, so fraud coming from international IPs, international credit cards etcetera. But comparatively speaking, the U.S. is more attacked or more attempted. There are more fraud attempts coming from international sources comparing to Canada.

Doug Hoyes:            Which kind of makes sense because the U.S. is 10 times bigger, there’s 10 times as many merchants. I guess there’s more to steal, so that’s probably another factor in it. Do you have any idea how much higher chargebacks are in Canada as compared to the United States then?

Rafael Lourenco:     So the numbers are not – they don’t converge necessarily. But combining all the different sources, I’d say around 20 to 30% riskier the Canadian transactions.

Doug Hoyes:            So Canadian transactions are 20 to 30% riskier for the merchants when you’re talking about card-not-present transactions.

Rafael Lourenco:     Yeah, versus America, yeah.

Doug Hoyes:            Versus America, for the reasons you just talked about. OK, so my final question then is, if I am a consumer and I’m worried about fraud, what should I do? And you’ve explained it quite well that, in most cases, if there is a fraud it’s going to be my bank, my credit card company that’s got to pick up the tab, or the merchant, so it doesn’t really affect me directly.

But if I do get defrauded, then at the very least I probably have to get a new card and maybe I’m not going to be using that merchant anymore, so there’s a lot of hassle involved. And who knows, it may end up having some impact down the line on my credit. I mean if I got defrauded by some family member and it’s still considered to be a legitimate transaction because I gave someone my card or something, then obviously I’m still on the hook for it.

But in the case of the pure types of fraud that we’re talking about – and again, I guess I’m speaking specifically about the card-not-present types of fraud – what as a consumer should I be aware of? What should I be doing? How can I at least lessen the risk that I’m going to have to go through this hassle?

Rafael Lourenco:     Sure, so I think there is a few quick tips, or a few advices let’s say I could provide. The first one is obviously the fact that sharing credit card information is never a good idea. So even if you trust somebody, or whatever relationship you have with somebody, sharing this information, it’s very personal information, and I’d say that it’s not recommended for you to by any means share this info. Especially take note of that on a piece of paper or any way that your credit card 16 digits is available may be used by somebody on a non-legitimate order.

A second thing that I would mention…

Doug Hoyes:            Just on that, so just on that point then, so if I want to share my credit card with my son, a family member or something like that, then I guess either don’t share it, or number two, I guess you could always get a secondary card with a completely different number, with perhaps a lower credit limit or something. So, ‘Here you go, you can use this card.’ It’s only got $1,000 limit, the most I can possibly be scammed for then is $1,000, but you don’t have access to my card and all my numbers.

Rafael Lourenco:     Correct. Yeah, it’s so easy to make a new credit card that I’d say that it’s much safer to make it a really personal info, right. So you have yours, your son or daughter has another one, your wife or whoever has a third one. So it’s easy to get multiple cards, and I think we should use that prerogative.

Doug Hoyes:            Okay. So don’t share your credit card information. I interrupted you there; what were your other pieces of advice be?

Rafael Lourenco:     So if you’re involved somehow – I think it’s possible to find online lists of compromised data – and if you’re involved somehow in those situations, those data breaches etcetera, then there will probably happen a phenomenon in which your orders, orders that you legitimately made online, or any other type of order or any type of transaction, they will be more likely to be flagged as risky, right, because somebody whose data was utilized or compromised in a data breach is more likely to be targeted by a fraudster than not.

So if you’re a consumer and you somehow have some – you think for some reason you were involved in a data breach, or your credit card or your personal info is out there available for fraudsters, you will be more likely to be flagged as a risky order, even if it’s yourself doing the order. Therefore, the merchant might eventually want to call you or to get in touch somehow.

So even though consumers in Canada and North America in general are not used to that process, perhaps you will receive a phone call to confirm some data, to match, to confirm if you were the one who made the purchase. And that might come from a phone from you don’t know, but in that case I recommend you to take the phone and not avoid this call, because that’s what’s going to help you receive your purchase at the end of the day.

So obviously, if you receive a phone call that might sound suspicious or might sound somebody making questions about your personal info, you don’t want to respond right away. You’re going to make sure that the person knows exactly what purchase you did. So for example, if ClearSale was calling someone on behalf of one of our clients, I would say ‘Hello, my name is Rafael. I’m calling on behalf of Walmart.com’ – just as an example – ‘and I want to confirm some data.’

If you’re receiving a phone call like this, there’s a chance that it’s a ClearSale call or whatever, or a call coming from a merchant, you as a consumer should, one, take the call. I think it’s for your benefit. And two, confirm, like wait for a confirmation on the merchant side first. So the question is not going to be what’s your birth date or what’s your credit number. The question will be more likely to be ‘Is the final four numbers of your credit card 4651’ or whatever, and then you’re going to say yes or no. And then the person on the other side of the line will know what good you just bought, how much it cost etcetera.

So receiving those phone calls is something that consumers are not, they don’t like usually, but it’s usually a part of a process to avoid the order to be declined. So my second tip is understand that it is a reality, the more the fraud rates grow, and the fraud rates are growing a lot, the more likely you are to receive a phone order like this.

Doug Hoyes:            And I guess the key in what you said there was you’re going to be answering yes-or-no questions. You’re not going to be actually providing information. And certainly here in Canada there’s been huge issues in the past with scams from Canada Revenue Agency, and I assume you probably have the same thing with the IRS in the States, people calling up saying ‘Oh yes, I’m with the government’ and you know ‘please confirm your Social Insurance Number or your Social Security number or something for me’. And obviously you never want to be giving that kind of information out.

But if you just made a purchase, in your example at Wal-Mart online, and someone calls and says ‘We’re calling on behalf of Wal-Mart and we are confirming that you just made a purchase. Did you just make a purchase, yes or no? Is this the last four digits of your credit card, yes or no?’ Those are yes-or-no questions. So your advice is yeah, you can answer yes-or-no questions, just don’t be providing any additional information. That’s the key there I guess.

Rafael Lourenco:     Yeah, correct. Exactly, 100% agree.

Doug Hoyes:            Okay, cool. And any other tips then for consumers to protect themselves?

Rafael Lourenco:     Well, I think the two ones that I just gave are good enough. And I’d say that my final comment is that any time you as a consumer understand [unintelligible 00:30:42] or have your purchase declined, which is the other side of the same coin, right. So sometimes you’re a [bit more fraud], but sometimes you are declined in a merchant that you did make a purchase but the merchant had the understanding that you didn’t, right.

So on one hand, yes you’ve got to try to understand that it’s probably part of a conservative fraud-prevention strategy. But on the other hand, I recommend and encourage anybody that suffers with that problem, that report it somehow to the merchant. Because at the end of the day, we want the market as a whole to be better than it is, right. If you as a consumer were declined on an order, then report to the merchant so the merchant will understand they made a bad choice. And further, for you or other consumers they will make better choices.

Doug Hoyes:            Excellent, and I think that’s a very good point. We want the ease but we also want the security, right. And so if there are glitches in the computer algorithm that’s rejecting your purchases, then yeah, by all means speak up. Talk to your bank. Talk to the merchant and say ‘Hey, I think you’ve got your algorithm tuned a little too tightly here’, and hopefully that can correct the problems in the future.

Well that’s fantastic. That’s excellent advice there Rafael, and I think that kind of helps us a bit more understand. I hadn’t really thought through the difference between a card-not-present and a card-present transaction, although now that you’ve explained it it’s quite objective.

So once again, your company name is ClearSale. And so if anybody is listening who’s actually a merchant, because that’s who your customers are, right?

Rafael Lourenco:     Correct.

Doug Hoyes:            It’s merchants, it’s banks, that sort of thing. And you operate all around the world, so not just in the United States but in Canada as well. So if there are any merchants who are listening to this and are going ‘Hmm, that’s something maybe we should consider because we seem to be doing more stuff online and getting hit with more fraudulent transactions’, what’s the website people can go to to find more information out about your company?

Rafael Lourenco:     So thanks for this opportunity to share that. We are on the website Clear.Sale. And down there you can see a lot of contents, not only the chance of get in touch with us but our blog.clear.sale is full of information, both for consumers and merchants, about eCommerce in general, about card-not-present orders.

So we’re a very content-driven company. And at the end of the day, we want to make the market better for everybody. So if you’re willing to have an online store or you already have it, and you want to know more about eCommerce and card-not-present fraud, blog.clear.sale is a good source of information, hopefully.

Doug Hoyes:            Excellent, fantastic. Well I will put a link to that in the show notes as well, but that’s a pretty easy address; Clear.Sale, S-A-L-E.

Rafael Lourenco:     Correct.

Doug Hoyes:            Clear, C-L-E-A-R obviously, Clear.Sale. And there’s lots of information there.

Well Rafael, I really appreciate you taking the time to do this. I think that’s some fantastic advice. Thanks very much for being here.

Rafael Lourenco:     Thank you, Doug. And I hope to talk to you soon. Bye, bye.

Doug Hoyes:            That was my conversation with Rafael Lourenco of ClearSale, a company that helps merchants around the world detect and prevent fraud from card-not-present transactions.

I wanted to have Rafael on the show because most of my guests here on Debt Free in 30 are guests that explain everything from the consumer’s point of view. That’s great, but learning about fraud from the merchant side of the transaction gives some great insights on how we can protect ourselves.

I agree with Rafael’s advice. Don’t share your credit card information with anyone. If you want to give someone else access to your card, like one of your kids or a relative, get a separate credit card with a separate account number for them, so that you can minimize your liability.

Second, you should decide what’s more important to you, security or convenience. If you buy a lot of stuff from one retailer, perhaps it makes sense to store your credit card and other information on their website so you can take advantage of one-click ordering, so you don’t have to enter your information each time. But of course that’s a greater security risk; so again, you should decide whether you are willing to take that additional risk for the added convenience.

No data is completely safe. And even if your bank protects you from fraud, if your credit card is compromised it’s a hassle to get a new card with a new number and re-set up any automatic payments. So avoiding fraud is always the best answer.

That’s our show for today. As always, full show notes, including a full transcript of today’s show and a link to everything we talked about, and a link to Rafael’s company and links to our previous podcast on fraud, can be found at Hoyes.com. That’s H-O-Y-E-S dot com.

Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

The post Why It’s Difficult to Prevent Online Fraud appeared first on Hoyes, Michalos & Associates Inc..

If you declare bankruptcy you are required by law to surrender your credit cards.  Specifically, section 158 (a.1) of the Bankruptcy & Insolvency Act says that you are required to:

“…deliver to the trustee, for cancellation, all credit cards issued to and in the possession or control of the bankrupt.”

So if you go bankrupt, you lose your credit cards.  It’s the law.

Read Transcript

Does that mean during the bankruptcy period I can’t travel, make purchases over the internet, and I’ll have to carry cash everywhere to pay for my daily purchases?  Not necessarily.

There are options that can help you survive without your old credit cards

1. Use a debit card, and that’s what I recommend for daily purchases. It’s just as easy to buy groceries with a debit card as compared to cash or credit, and it allows you to easily keep track of your spending (it will be on your bank statement every month), and you have no worries about getting into debt (since you can only spend the money in your bank account, unless you have overdraft protection, which is not recommended while you are bankrupt).
2. Get a prepaid credit card. You “deposit” money onto the card, and that’s all you can spend.  This is a good option because you are not borrowing; you can only spend money you have already saved.
3. Use a supplementary card. If credit card is essential, you can ask a family member or friend to get a credit card, in their name, and add you as a supplementary card holder. It’s their card, and they are fully liable for it, so the credit approval is based on their credit, not yours.  Of course that also implies that if you overspend and don’t make the payments on the card, your friend or family member is now liable for the debt, so be very careful with this option.  I would suggest that the credit card have a small credit limit, be used for emergency purposes only, and be paid in full each month.
4. A secured credit card is an option.  Offered through several companies, including the Home Trust Secured Credit Card, this is very similar to a prepaid credit card because you must put on a deposit with the credit card company funds in advance.  If you want a $1,000 limit on your secured credit card, you must provide a $1,000 deposit.  This is a good option because again, you can only spend the money you have already deposited.  This type of card has the advantage of beginning to rebuild your credit, because it appears on your credit report as a credit card.
5. Save up and plan for bigger purchases. Prior to bankruptcy, debt payments were consuming a big chunk of your paycheque. Bankruptcy payments are usually much lower than what you were paying before giving you an opportunity to make better use of your budget. Here’s an easy budgeting tip: start by putting money into a small emergency fund and save for any larger purchases. Individuals who file bankruptcy are even able to begin to save money right away towards any down payment they may need that can ultimately help them qualify for a lower cost car loan or mortgage when their bankruptcy is complete.

If you’re worried about losing access to your credit cards and other credit my recommendation is to focus on the big picture.  If you choose to file bankruptcy to deal with a huge amount of debt your goal should be to eliminate your credit card debt, and not get back into debt again with more credit card debt when the process is finished.  That fresh start is your number one goal.

Then, once you have that fresh start, if a credit card is essential, consider your options and pick the option that will meet your objectives, but also prevents you from incurring new, unwanted, future debt.

The post 5 Ways To Survive Without a Credit Card appeared first on Hoyes, Michalos & Associates Inc..

There is no sense in continuing to struggling with minimum payments because you want to keep the convenience of a credit card. It is possible to eliminate credit card debt by filing a bankruptcy or consumer proposal.

But what happens if you have a credit card that has no balance owing?  Are you still required to surrender that card?

The short answer is yes.

Section 158(a.1) of the Bankruptcy & Insolvency Act states that a bankrupt shall:

deliver to the trustee, for cancellation, all credit cards issued to and in the possession or control of the bankrupt

The law is clear.  You are required to surrender your credit cards, whether or not there is a balance owing.

Why does this law exist?  Should it not be up to the credit card issuer to decide whether or not you can keep a credit card with a zero balance owing at the time of your bankruptcy?

Yes, it should be their decision, and that’s the point.  The trustee is required to notify all creditors of the bankruptcy, so if the zero balance credit card is not listed, the lender may not immediately be notified of the bankruptcy.  As a result, if you use your credit card, they could end up lending to someone who is bankrupt without even knowing it.  That’s not fair, because they were not given an opportunity to make their own decision.

But what if you need a credit card while you are bankrupt, for travel, or work purposes, or to make on-line purchases, or to book a hotel room? Doug & Ted talk about how you can manage without a credit card during bankruptcy:

Read Transcript

You have two choices:

First, you could ask your spouse, a family member or a friend to get a credit card with a small credit limit and add you as a supplementary borrower.  The primary borrower is responsible for the card, so you want to be sure the card is paid in full each month.

Second, you could get a secured credit card or a prepaid credit card to use in emergencies.  Some lenders require you to be discharged from bankruptcy before they will lend, but in some cases it is an option.

Ultimately, there are no secrets.  Even if you “forget” to disclose a zero balance credit card to your trustee, the credit card probably appears on your credit report, so if any of the other creditors look they will probably see the card and start asking questions, so  the best course of action is to surrender all credit cards.

If you are struggling with debt, contact us today for a free consultation. You don’t have to decide right away but getting a debt assessment will help you find options that can give you a fresh financial start.

The post Do I Have To Surrender My Credit Card in Bankruptcy? appeared first on Hoyes, Michalos & Associates Inc..

The following is a real client story from Alison Petrie, Licensed Insolvency Trustee. Alison talks about the long slow cycle into debt that one couple experienced as a result of their reliance on credit cards to balance their budget, despite being so careful with big financial decisions. 

John (all names changed for confidentiality) works full-time while Michelle works part time with two preschool children at home.  Knowing that their income was limited, they made as careful a decision as they could on the big purchases. Wanting a home for their family, they chose to live in a smaller house that they purchased three years ago for $150,000 and today their mortgage is only $118,000. They own only one car (a new one), but they were happy that their payments were lower than what they were paying for repairs on the old one, and with only one car, they needed to make sure it was reliable.

Despite this, John and Michelle came to see me because they had accumulated $70,000 in credit card debt.  They just couldn’t understand how they had managed to accumulate that much credit card debt while trying to make good financial decisions around their home and car. Unlike your mortgage and car loan, debts like credit card debt and lines of credit are considered revolving debt. With revolving credit you can use the funds when you need them, don’t have to make fixed monthly payments and as you pay it off you can use it again. The problem with this type of flexible credit is that it can, and does, quickly get out of control and that’s what happened to John and Michelle.

Here are some danger signs John and Michelle could have watched for:

7 Credit Card Danger Signs

1. Not knowing your monthly expenses. Before John came to see me, he contacted a financial counsellor through his EAP at work and the counsellor asked how much the family spent in various areas. John didn’t know so he and Michelle got together one weekend, wrote it down and added it up.  John was horrified to see they were spending more money every single month than they earned.
2. Using credit to create cash flow. John and Michelle were able to spend more than their income by using credit. If there wasn’t enough money in the bank account, they paid for necessities like food with a credit card. They thought this was just a temporary problem until payday.
3. Charging more than you are paying off. Most people don’t look at how much they owe on a credit card, they only look at the minimum payment.  The minimum payment is very small and manageable, at least in the early days.  For 2 years John and Michelle made the minimum payments on the cards quite easily.  Because they focused on the payment, rather than the balance, they didn’t notice that every month they charged more on the credit card than was paid off, and that they were getting deeper in debt every month.
4. Stalling one creditor to pay another. This is commonly known as “robbing Peter to pay Paul”. You take a cash advance on one card to pay the minimum on another. Eventually, you skip a payment on one card this month and skip a payment on another card the next month. Soon the creditors start calling about the skipped payments. For John and Michelle, this is when the stress levels really began to rise.
5. No savings or emergency plan. The reason John and Michelle turned to credit cards each time a small cost came up was because they didn’t have any cushion in the form of savings to rely on. Without an emergency fund, John and Michelle couldn’t weather the impact of even small demands for cash. Life will always throw you curve balls. You must have some savings so you can pay for non-regular, random occurrences.  On the surface their decision to spend less on a car payment rather than car repairs seems sensible, but the car payment comes out of their bank account and further depletes the cash available for other unplanned costs like a wedding invitation, dental bills or house repairs.
6. Running out before payday. The final straw for John and Michelle was the fact that eventually they found themselves short of cash each and every payday. This is not an uncommon side effect of continuing to use credit. As your credit card bills increase, so do your minimum payments. Now debt payments take up an ever increasing share of your paycheque. In extreme cases you go out and get a payday loan to buy groceries because your paycheque is going to pay interest on your credit card debt.
7. Consolidating debt and racking up the mortgage. Desperate to reduce their credit card debt, John and Michelle considered a debt consolidation loan. The problem was, with $70,000 in credit card debt and only $30,000 or less in home equity, a debt consolidation loan was only going to take care of part of their debt. And if they didn’t deal with all the credit card debt, John and Michelle were deathly afraid they would end up losing their home.

That’s when they came to see me. We talked about making a consumer proposal which would allow them to offer a deal to their creditors to settle all of their $70,000 in credit card debt for roughly $35,000.  This amount was based on the equity value in their home, plus an amount based on John’s income which was fairly good. They were able to spread the payments over five years. When combined with some budgeting advice, John and Michelle found they were able to balance their budget and even get ahead on their savings, without using credit cards to survive.

If you are paying off your balances in full each month, using a credit card to pay for purchases makes a lot of sense. You earn points, there is no need to carry large amounts of cash and there is some added security in being able to cancel your card if your wallet is lost or stolen. However, these benefits are quickly overshadowed by interest costs if you can’t eliminate your credit card debt. Credit cards can swiftly morph from an ease of payment tool into a way to make ends meet. In effect, your credit cards change from a ‘credit’ tool to a ‘debt’ tool.

Do any of these “danger signals” or “symptoms of financial problems” sound familiar?  Are you struggling to repay large credit card debt balances? If so, give us a call  to book a free consultation where we will help you develop a plan to eliminate your credit card debt and start over financially.

The post 7 Reasons Why Credit Cards Can Be So Dangerous appeared first on Hoyes, Michalos & Associates Inc..

Today we look at card options for those with damaged credit, specifically a secured credit card.

What does a secured credit card offer?

One of the biggest worries people have about filing bankruptcy or a consumer proposal is the loss of their credit cards and their credit history.

An option for many of our clients to to apply for a secured credit card. Like any credit card, a secured credit card is a transaction based card so you use it for daily transactions like renting a car, booking a hotel, buying something online.

A secured credit card is a real credit card, with real credit limits and is reported to the credit bureaus meaning using the card (wisely) can help you rebuild your credit. By using a secured card, and paying your balance off each month, you begin the process of re-establishing your credit.

No one outside of the credit bureaus knows the formula that goes into generating a credit rating, but some areas that are taken into consideration include the length of time you’ve had credit, your payment history and how long that history is, demographic information, recent inquiries made by financial institutions and the utilization of credit.

Having a credit card and using it wisely are good ways to begin the process of rebuilding credit.

So how much credit do you need?

Most people get a secured credit card for between $500 a $1,000. That amount is easy to save up during your bankruptcy or proposal and generally provides enough to cover reasonable charges and be able to pay that amount off in full each month. 

However access to a bigger amount of credit, but only using a small portion of it shows that you’re using that credit responsibly. So should you save up more & apply for a larger limit?

It is often over-use of credit cards and build-up of overwhelming credit card debt that lead to financial problems in the first place. Having a higher limit, even though it is secured, still requires you to be able to pay off any balances you charge on the account every month if you really want to start creating better credit card habits.  Can you do this if you give yourself a higher limit?

Whether you should get a secured credit card, and for how much, is a decision that will have to be made by you based on your specific personal situation.  At Hoyes Michalos, we never advise anyone to get a credit card during or right after bankruptcy unless they absolutely need one or they have a future need for good credit.  You’ve lived without a credit card during your bankruptcy. It may be possible to continue to do so after your bankruptcy is completed.

If you must get a credit card, either during or after bankruptcy, follow these tips:

1. Use your card as a substitute for cash, not a substitute for borrowing;
2. Make sure that you are disciplined about making your monthly payments and don’t carry a balance;
3. Replace the high interest card with a less expensive one once you have rebuilt your credit.

Resources Mentioned in the Show

• Debt Free in 30 Podcast, Show 21 – Credit Reports, Credit Scores & Rebuilding for the Future

FULL TRANSCRIPT – Show 42 with Jim Dunbar

As I record this show in June 2015, interest rates are at record lows. If you have perfect credit, you can get a conventional mortgage for 3% or even less. With good credit you can still get a car loan at close to zero interest. But what happens if you have less than perfect credit? The answer is that in many cases your only option for credit is through a high interest loan or a high interest credit card. And I can tell you there are lots of lenders willing to lend at high interest rates to people with less than perfect credit.

When I started out in the debt help business 25 years ago the big players were the finance companies, many of whom no longer exist. Today it’s not the finance companies that dominate the market. If you have poor credit your options are the higher interest lenders including some specialized finance companies, as well as payday loan companies and high interest credit cards.

So, what’s the deal on high interest credit cards for people with damaged credit? Are they a good deal or should they be avoided at all costs? To find out I’ve asked a provider of credit cards to people with bad credit to be a guest on the show. Before I introduce him, let me give you my standard disclaimer. The guests on this show, Debt Free in 30, are invited by me because I want to hear their perspective. I don’t just invite people I agree with. I also want to make it clear that I don’t pay any of my guests to appear on the show and none of my guests pay to be on the show. Debt Free in 30 is not a commercial for any of my guests; it’s a forum for my listeners and for me to hear many different points of view.

So, with that background let’s get started with today’s guest. Who are you? Where do you work and what do you do?

Jim D: Well, thanks for having me Doug. My name is Jim Dunbar. I am the Managing Partner and Chief Commercial officer for Affirm Financial Services.

Doug H: So, tell me a bit about Affirm Financial Services, then. That’s obviously not a big bank.

Jim D: We are a finance company. We are a Canadian based finance company. We’ve been in market now for a little over four years serving Canadians. We provide consumer loans, term loans and credit card solutions to customers who are not being served by the banks. That’s probably the best way to describe it.

Doug H: Great, okay. Well, thanks for being with me here today, Jim. So, let’s talk about the credit card product. As I understand it Affirm Financial has a credit card that you can qualify for even if you’re bankrupt or in a consumer proposal. Is that correct?

Jim D: That’s correct. We have designed the product for people that are in bankruptcy or consumer proposal and for those who have been recently discharged.

Doug H: Okay. So, and I understand the need for such a thing. And in fact the question I get asked all the time by somebody who’s thinking about going bankrupt is, yeah but if I go bankrupt I know I lose all my credit cards; how am I going to be able to book a hotel room cause I have to travel for work? I give them some advice on how to go about doing that, having family or friends get you a card for example, or have your employer get you one so it’s not really your card, you’re just able to use it. But a lot of people don’t have that option; they don’t have a family or friend who’s willing to give them access to a credit card. So, that’s where a service such as yours comes in. But, obviously there’s some costs associated with that.

So, let’s go through the main points of this credit card that you’ve got. So, what’s the credit limit that you offer? And let’s take the case of somebody who is currently bankrupt.

Jim D: Well, if somebody is currently in the process and currently bankrupt, the maximum credit limit is $1,000. When someone comes out of bankruptcy and has been discharged, that limit goes as high as $4,000.

Doug H: Okay, so during the bankruptcy period $1,000. What security deposit is required on that card?

Jim D: That’s a good question. There is no security deposit required on the card. And I think that is probably the most important description here: this is not a prepaid card and this is not a secured card. This is an unsecured credit card; it’s an actual MasterCard that is made available for our customers.

Doug H: So, what are the qualifications terms then in order to get this card?

Jim D: We do offer this card to people that it’s the first time they’ve been bankrupt. And that they have a source of income. We verify that source of income; we think that ensuring that someone has the capacity to pay back and make the monthly payments is critical, but once that’s been demonstrated we’re able to offer the card.

Doug H: So, okay we talked about all the good things. You know, it’s got $1,000 credit limit, even if you’re bankrupt so long as it’s your first bankruptcy. So long as you’ve got a job or a source of income you qualify, there’s no security deposit required. Obviously there is a catch. What is the monthly fee on this card?

Jim D: There is a monthly fee, it is $7 a month and that’s the only fee associated with the monthly use of the card.

Doug H: So, even if I don’t use it, even if I don’t borrow any money, I’m paying $7 a month. What is the interest rate if I have a balance owing?

Jim D: The annual interest rate on the card is 28.8%.

Doug H: So, just under 29%. So, okay so let me play devil’s advocate here. Every bank in Canada has a credit card and the typical interest rate is I don’t know 19% or lower, and most basic credit cards have no monthly or annual fee. So, why should someone consider your card which has a higher interest rate and has a monthly fee?

Jim D: I think that’s a great question and it’s one that I’m happy to talk about and it’s one that we’re very open about with our customers. The reason our rates are a little bit higher than the bank is simple. We’re not a bank. We borrow our money from the bank. So, our cost of funds are automatically a little bit higher than the bank. And in addition we are also taking on some additional risk in order to provide our service, which the bank isn’t able to provide. So, it costs us a little bit money and that is reflected in having a monthly fee.

But I do want to be really clear. We’re not suggesting that we’re trying to compete with the bank. We’re offering a very competitive rate product to people where they’re not able to get financing from a bank. And in fact, part of our conversation with our customers is, when you can get traditional financing or you can get a card with a different interest rate at a bank, we encourage that, and we support that by not having any fees associated with paying the card out early or paying a loan – more specifically paying a loan out early. We don’t have fees associated with that. We want people to get the best rate they can. When they can’t we think we’ve got a very competitively priced product.

Doug H: So, you think your typical customer will only be with you for a limited period of time during their bankruptcy, maybe for a year or two or three after their bankruptcy is finished or until they’ve re-established their credit in some other manner. You don’t expect you’re going to have anyone with this particular card for 10 years is that correct?

Jim D: Well, I think that’s absolutely the way to look at it. The card is there at a time when you need to start either establishing credit or you need to re-establish credit. It is a transaction based card so you use it for daily transactions we mentioned earlier, renting a car, booking a hotel, buying something online. It really is designed to be a daily transaction card. The idea is that you pay it off every month. We keep the limits very manageable. And when you can find a card that’s cheaper, that’s absolutely what we would promote.

Doug H: It still sounds kind of to me that you’re kind of taking advantage of people. So, a normal credit card rate would be maybe 10%, 15%, 20% with no fee, with yours, you’re paying $7 a month. So, even if I don’t use the card that’s still $84 a year. Wouldn’t I be better off taking that $84 putting it in a savings account so at the end of the year I’ve got $84? Go out and use that money, go out and use that money to start re-establishing your credit. It’s – again, it seems to me like such a high number. Do you perceive that you are taking advantage of people?

Jim D: Absolutely not. I think that the price is really designed to be there to provide a facility and utility for someone to have a credit card. There are secured cards out there. This is actually a credit card. This is a real credit card. It has a real credit limit assigned to it. It has an ability for you to use it and to gain credibility at the credit bureau for purposes of your credit reporting. We report all credit payments to the credit bureau, and it is a $7 fee a month, but we kind of look at it as for $84 a year you have the utility of a card, you have access to actual unsecured credit card and you’re building credibility with every payment you make on it to support your credit bureau score.

Doug H: Well, and that’s another good area to talk about then, building your credibility, supporting your credit score. I’d like to talk more about that and I’d like to hear your thoughts on, okay is this really building my credit score or is that really just more of a sales pitch you’re making?

But before we talk about that let’s take a quick break and we’ll come back and talk about whether or not a credit card like this can actually help improve your credit score. We’ll be right back. I’m talking to Jim Dunbar of Affirm Financial; you’re listening to Debt Free in 30.

Announcer: You’re listening to Debt Free in 30. Here’s your host, Doug Hoyes.

Doug H: Welcome back. I’m talking today with Jim Dunbar who is with Affirm Financial Services. They offer a credit card that people can get even if they are bankrupt, even if they’re in a consumer proposal or even if, for whatever reason, they have very challenged credit.

And before the break we were talking about the parameters of this card: there’s a $7 monthly fee, the maximum credit limit is $1,000 if you are bankrupt at the time you get the card, the credit limit will increase (or can increase once you’re discharged from your bankruptcy), and there’s also an interest rate of 28.8% if you’re carrying a balance every month, which I think kind of defeats the purpose of a credit card like this, but that’s the perimeters.

So, I said to Jim before the break, that’s awfully expensive isn’t it? And he said, yeah it’s expensive but there are number one, not a whole lot of options if you need a credit card while you are bankrupt cause you need it for work you need it to book hotel rooms then this an option. So long as you pay it off every month the cost is $84 a year for that credit card. You’ve got to decide for yourself whether that makes sense.

Now the other point that Jim made just before we went on break was that this also actually helps you improve your credit score. So, let’s talk about that. And maybe we can start with some basic definitions here. What are the kind of things that go into your credit score? And I know Jim, you’re not a representative of Equifax, neither you nor I know their secret formula, but give me a bit of an overview of the types of things that go into a credit score and then we can bring it back to this card in particular.

Jim D: Sure. Well, I like this question and you’re right. I’m not representing the bureau on this answer, but I can tell you about some of the specifics that do drive the score. It’s a difficult question to answer but it is one – and it’s difficult cause it calculates so many different variables and it’s very specific to an individual’s actual credit information. So, there are a lot of different calculations that go into it.

But to give you some examples it looks at things like the length of time that you’ve been on the credit bureau, looks at things like payment history, it looks at how long that payment history has been in effect. It looks at very unique demographic information, specific to the individual. It looks at things like recent inquiries, where financial institutions may have been or whether or not the person has been seeking credit. It looks at – a very important one is utilization of credit.

So, it does a calculation and looks at of the credit that you have available to you, how much of it have you used and how well are you paying it back as per the terms? So those are examples of the kinds of things that really can impact somebody’s score and so there are a lot of calculations but those are the kinds of things that people can be aware of.

Doug H: Okay, and we’ve talked before on this show about credit scores and how they work. And I’ll put some links in the show notes to some of that information.

So, okay we understand there’s a bunch of parameters that go into it, do you have any evidence that your specific card actually helps? I totally agree with you, the longer my payment history the better my utilization, the better my credit score but what about your card in particular? Do you have any evidence that your card actually helps people improve their credit score?

Jim D: Well again, I think it’s important to note that it’s one variable in a series of quite a few calculations. But we did do a sample of 2,000 of our accounts. We looked at accounts that were in bankruptcy or some that had been recently discharged and we took a sample of 2,000 accounts dating back to 2012. And we looked at those accounts and we were very pleased to see that over 65% of those accounts in that category had a score range of 675 or better. What that score really means is, the banks kind of look at between 700 and 675, 680 as where they have a cut-off if you want to call it that. That’s a range I’m guessing a little bit, that’s about where they are. 65% of the accounts that we looked at in that very short amount of time, had now achieved that rate. And we know that part of that process is impacted by the fact that they had an active credit card with us that they were paying according to the term. So, they were paying it well and their scores were going up.

Now there were other factors but it’s a really good indicator. 43% of those accounts were up over 700 so that is a really impressive improvement for those accounts, which we know can have, or were having some impact.

And I think what’s important is we’re trying to give people the ability to start making that impact sooner. So, while people are in bankruptcy they’re using that card and they’re getting that benefit and they’re creating that history. And I think that’s a really important distinction about what this card can do because it really is trying to get the process started earlier.

Doug H: Do you have any knowledge of what the person’s credit score would have been prior to starting? So, what you’re saying is we looked back and somebody who got our card a year or two ago may very well have a credit score of 700, which is starting to get into a decent range. But, did that person have a credit score of 700 two years ago anyways? Do we have any way of knowing whether the card was actually a contributing factor to that?

Jim D: Well, I can assure you that all – they’re very unique, but it’s very difficult for me to give you that level of detail, because we have to aggregate the results. But that said, I think there would be very few to any that would even have been anywhere near that range. Because of when they applied for credit, their credit scores were actually quite low. They were as low as four or five or low 600’s, most on average. So, really we’re talking about accounts that probably had very poor scores that actually made some pretty dramatic improvement.

Doug H: And I understand that obviously you’re not going to release individual client information here, that’s not possible. But what you’re saying is you’ve taking a sample of a couple of a thousand people and you took a look to see – well, you know roughly what their credit scores are when they start the program because they are either in bankruptcy or just out of bankruptcy, they’re in a consumer proposal or for some other reason they have not great credit. And those people would typically have scores of you know, 400, 500, high 500’s maybe into the low 600’s. And by the time a year has gone by, or two years have gone by, obviously being discharged from bankruptcy is going to have a positive impact on their score, but a significant chunk of those people now have a credit score of 700 or higher. That’s what you’re saying.

So, does having a higher credit limit matter? So, I can go out and get a secured Visa card for, you know, let’s say with a $500 limit. I can get your credit card even if I’m bankrupt up to $1,000 limit. Once my bankruptcy is finished the limit can increase. Does size matter when it comes to the outstanding availability on your credit card?

Jim D: Yeah, I think I’ll answer that question; the answer is: yes it can have an impact. And I think the best way to describe it probably would be with an example. So, if someone has $1,000 credit limit and on average they carry or use $500 of that in a particular month or on average that’s what they use, their utilizing 50% of the credit that they have available. If somebody had that same payment pattern, and they had a limit of $2,000 on the card, now they’re using half of that (so 25% of the available credit).

And what the calculation is really looking at is a bit of size matters so it does matter what the limit is and then, but a more important calculation is really how much of what is available to you have you used and I think that – so limit can make a difference, but it is consistent with if your spending habits stay consistent. And that’s probably the better way to approach that question.

Doug H: Yeah and we don’t know what the exact formula is with the credit bureau, but the people I’ve talked to have told me that, yeah utilization of 20% is a lot better than a utilization of 80%. So, the bigger amount of credit that you have access to, but you demonstrate you’re responsible by using only a small portion of it, therefore makes a difference.

So, I guess the concluding comment then in this segment would be that the $84 a year that it’s going to cost me to pay the $7 monthly fee on a $1,000 credit card is actually also helping improve my credit score longer term. Is that essentially what you’re saying?

Jim D: Yes, absolutely.

Doug H: Okay, well that’s very helpful information. I know you also have a term loan product. And we’ve only got about a minute here but the term loan product is something once you’re bankruptcy or once your consumer proposal is finished. Is that correct?

Jim D: That’s correct.

Doug H: And the maximum you can get on that term loan would be how much?

Jim D: It would be $5,000.

Doug H: And the interest rate on that would be how much?

Jim D: Those interest rates also start at the 29% range.

Doug H: And could be a bit higher than that. And what’s the monthly fee on those loans?

Jim D: There are no monthly fees. So it is just an annual percentage rate and I think what’s worth noting on these, these are also unsecured loans and they are open, they have a term to them, but if someone would like to pay it sooner or pay it faster than the term there are absolutely no penalties to that. So, if someone can borrow the money at a better rate throughout that term, we encourage them to take advantage of that and there are no penalties associated with paying it sooner.

Doug H: And in effect you’ve already said that in the first segment what you’re really trying to do is get the person into a better position. And you assume that five years from now they’re probably not going to be your client anyways because their credit will be such that they can borrow at a better rate. So, I think that’s a great way to end this segment. Jim, thanks for being here today.

Jim D: Thanks very much for having me.

Doug H: Great thanks very much. We’ll be back to wrap it up right after this on Debt Free in 30.

Doug H: Welcome back. It’s time for the Let’s Get Started segment here on Debt Free in 30. My name’s Doug Hoyes and my guest today is Jim Dunbar of Affirm Financial Services. His company offers products to help people rebuild their credit and one of the products is a credit card. The credit card carries an interest rate higher than what you’re going to get at the bank. It also carries a $7 a monthly fee, but it’s a fully unsecured credit card, meaning you don’t have a security deposit and you can get this credit card as soon as the bankruptcy starts.

Now what I want to talk to you about in this segment, Jim, is what is your advice to somebody who wants to rebuild their credit, because this is kind of the common question I get from everybody. Okay, I’ve had issues in the past, I lost my job, I went through a marriage separation or divorce. I had some medical issues, I had to go bankrupt but I want to get back on track again. Someday I would like to buy a house, finance a car. I want to have access to credit. So, what are the steps that need to be taken?

And obviously, the obvious steps are well you’ve got to cut your expenses so they’re below your income; you’ve got to be saving money and things like that, but to build up your credit you have to have things on your credit report. And as we talked about in the previous segment, time matters. So, what in your mind then is the first step? Would it be to, perhaps after you’ve built up a bit of savings or something in your bank account, would it be to get one of your unsecured credit cards?

Jim D: Yes, I think the very first thing I think is to understand what is an affordable monthly payment for you and what’s the right kind of credit? I think a credit card would be a great place to start. The important thing is, the sooner you start, the sooner you start to improve the benefit of having- establishing new credit and making the monthly payments. The second probably most important thing is that you use the card within the means that you’ve established so that you are paying the credit back and paying either the monthly payment or the entire balance off every month, so that you’re continually getting that credit and helping to establish yourself back at a credit bureau.

Doug H: Yeah, and my advice of course is going to be okay I understand why a credit card may be necessary; you need to have a credit card to book a hotel room to do other things, and you also want the added benefit of having it begin to rebuild your credit, so that kind of makes sense. I am not a big fan of carrying a balance on a credit card whether you’re bankrupt or not, whether you got lots of money or not. I don’t think that’s the way you should be borrowing. Obviously, your business model is such that well yeah we don’t mind if people are carrying a balance so long as they’re making the minimum payment that’s obviously how you enhance your revenue.

So, I get the credit card at the end of my bankruptcy, what happens then? So, I’ve been paying my credit card every month doing a great job, at what point then am I able to increase the limit on that card?

Jim D: The limit can be increased once someone is discharged for bankruptcy. So, we’ve set up the program where we’ve tried to offer a limit that provides value for the purposes of transactions, but once out of the discharge we’re able to look at it and apply a different approach to the credit limit. I also want to – I do agree with you, credit cards are not designed to be a means of borrowing and I think it’s really important that people think about a credit card for the purposes of a transaction and they pay if off every month. And I think that’s probably the most important part of this message. Once someone comes out of that process, there are means and people would like to have a higher limit and that’s where we approach things a little differently and we have limits for both the loans and cards once someone comes out of discharge that are higher.

Doug H: Yeah the credit card should be a substitute for cash, it shouldn’t be a substitute for borrowing. That’s what it’s there for.

Jim D: Yes.

Doug H: So, my bankruptcy ends. I call you guys up, maybe you bump my credit limit up to $1,500 or $2,000 or whatever, and am I still paying the same $7 monthly fee or does that go up?

Jim D: No, that rate stays the same. And what we are able to do is start to look at, based on credit payment performance and where you are in that process, a higher limit.

Doug H: And at that point then I could also apply for a term loan so that I then have two different things in my credit report and so that I have higher credit which then factors into the whole utilization category we talked about. So, at what point would someone be able to apply for a term loan?

Jim D: Yeah once they’re discharged from bankruptcy you can apply for the term loan. And I think the term loan really is designed to provide a short-term cash need that has an end date in sight. So you borrow the money with the idea that at a specific term you pay that money off.

Doug H: Yeah, the goal is not to have a loan that’s going to be there forever. Maybe it’s okay I’m going to borrow the money and I need to buy a really inexpensive car, I need to do some car repairs or something specific. So, I have the loan for a year or two years whatever, but I get it paid off and hopefully at that point in time once it’s paid off my credit is therefore better. Is that really the whole concept?

Jim D: Yeah, that’s the whole concept and both credit facilities do help to provide you with improvement in the credit score.

Doug H: Yeah, so I guess the advice for people then is crunch the numbers, I’m certainly not going to tell you you should get a credit card or a loan or you shouldn’t. You’ve got to look at your own individual circumstances and decide what’s going to make sense for you, great, thanks very much for joining me today, Jim.

Jim D: Great, thanks again.

Doug H: We’ll be back to wrap it up on Debt Free in 30.

Announcer: You’re listening to Debt Free in 30. Here’s your host, Doug Hoyes.

Doug H: Welcome back, it’s time for the 30 second recap of what we discussed today. On today’s show Jim Dunbar explained the features of their credit card product for people who are in bankruptcy or who don’t qualify for a credit card from a traditional bank. That’s the 30 second recap of what we discussed today.

As I said during the show, these credit cards carry a monthly fee and a high interest rate. So you should only get one if you have no better options and you will be disciplined enough to pay it off every month and to replace it with a less expensive option once you’ve rebuilt your credit.

Doug H: That’s our show for today. Full show notes, including links to the products we discussed on today’s show are available on our website at hoyes.com, that’s h-o-y-e-s.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

The post Is It A Good Idea To Get A Credit Card During Bankruptcy? appeared first on Hoyes, Michalos & Associates Inc..

Penalty Rates on Overdue Or Delinquent Credit Cards

You credit card company may charge you 19.99% interest on all outstanding balances. And that rate will hold as long as you make at least the minimum payment. But if you miss a payment, watch out, the cost of your credit card debt goes up.

Almost all credit card companies have what they call a penalty interest rate clause.

TD bank is raising interest charges on overdue accounts and dramatically increasing the period you have to live with the higher rates.  I assume that the other banks and credit card companies will follow suit with similar penalty interest rate charges.

Let me briefly describe the change TD has announced and then explain the significance.

The old policy for people that missed their minimum payment by 30 days was to increase the customer’s interest rate by 5% and keep it there until the customer made 2 minimum payments on time in a row.

The new TD policy is to charge 24.99% interest on purchases and 27.99% interest on cash advances until the customer has made 12 consecutive minimum payments on the account.

Read More: Are Minimum Payments on Credit Cards are Keeping You in Debt?

The bank’s notice provides an example that uses a $2,500 balance and explains that the new charges will cost the customer an extra $8.47 per month.  That doesn’t sound too bad, unless you owe more than $2,500 and you end up paying that extra amount for a very long time.  Using  the bank’s example, the extra interest over 12 months equals $101.  If any payments are late during that year the 12 month clock starts ticking again.

If you owe $25,000 on your credit cards then is will cost you and extra $1,000 per year.  That’s money that previously would have reduced your debt (and therefore interest charges).

The truly frustrating part of all of this is the fact that the banks can simply alter the terms of your credit card agreement whenever they want.  In this case, they are dramatically increasing the costs for people in default – the people in the most need of some extra consideration and help.

If you owe money on your credit card, check your credit card terms and conditions to learn what rate you may be trapped into if you miss a payment or two.

Late payment penalty clauses are one more reason to develop a plan to deal with your debt.

The post Consumer Alert – Late Payment Penalty Rates on Credit Cards appeared first on Hoyes, Michalos & Associates Inc..