110 – How Credit Cards Can Become a Problem

Wayne Kay 00:04
Credit cards. Can’t live with them, can’t live without them. How do they become a problem? That’s going to be our discussion today on the Debt Matters podcast. We help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay, and today we’re going to talk about those credit cards. All the advantages of credit cards, all the disadvantages of credit cards. When does it become a problem? How do you deal with it? And what can you do about it?

To help me out with this, Daniel Maksymchak joins me from LCTaylor Licensed Insolvency Trustee in Winnipeg, Manitoba. Welcome back to the show, Daniel.

Daniel Maksymchak 00:46
Hi, Wayne. Good to speak with you again.

Wayne Kay 00:48
We always learn things from you, and I enjoy this. And this is a great topic about credit cards. Every time I go into a store, almost, I’m getting asked, would you like a credit card? Because you can save money. There’s no way to get away from them.

Daniel Maksymchak 01:04
Yes, I mean, there’s a lot of sales in terms of credit cards. Like you said, you go into a store, each store has their own credit card, essentially tied to Visa or Mastercard, that gives you supposedly special points or bonuses when you use that card in that store. And it seems like each card has their own version of a Visa or Mastercard they’re trying to push on you.

Wayne Kay 01:27
For the longest time, I did not have that. I just had a basic card, and I refused to get anything with points.

And they say, well, we’ll give you 20% off this purchase if you get a card. No, thank you. I’ll pay the extra.

Daniel Maksymchak 01:42
Yes, it comes down to what you do after you get the card, right? So if you go and you get the card and you get 20% off your item and you never use it again, I guess there’s no real downside to that besides the time spent applying for and canceling the card.

But what they hope that you do is you continue to use that card both at their store and in other places so that they can A, get that fee that gets charged to the merchant every time that you use a card in the store and B, rack up a balance that has to accrue interest on that has to be paid. And they make money that way.

Wayne Kay 02:14
Yes, for sure they do. Okay.

Daniel Maksymchak 02:17

I’ve seen the Bank Financials Quarterly. They’re doing all right.

Wayne Kay 02:23
But it becomes a problem when….

Daniel Maksymchak 02:27
It becomes a problem when you can’t repay the balance back each month. It’s one thing –  you go and you charge something on a card that you could have bought with cash, if you have the money sitting in your account, you can turn around and pay that card off. It hasn’t cost you anything to use that card.

And you might have even gained something such as the points on the card or some insurances or warranties that can be achieved or accessed by paying for something with a card. And it hasn’t cost you anything because you haven’t accrued any interest. 

But where it becomes a problem is where you buy something that you don’t have the cash to cover. So you go and you buy something because you have the card and you can put it on the card, but it’s not something that if you had to pay by cash, you would have bought or even been able to have bought. 

And then since you can’t pay the bill off at the end of the month, interest accrues credit card interest rates are usually very high, and that’s where you start running into trouble.

Wayne Kay 03:21
I can’t even believe how high those rates are, but we’ll get to that in just a moment. But you did say there’s a couple of positive things to it. So let’s talk about maybe some of the advantages of credit cards. What would those be?

Daniel Maksymchak 03:33
Yes, so the biggest advantage of a credit card is to pay for something online. I would say something that you can’t physically give the person selling cash because they’re on the other side of a computer. Right. 

So a credit card allows them to get payment, it allows you to be charged, and you just have to deal with the credit card company to pay that off. There are, as I said, some other kind of more minor benefits. Depending on the card that you have, you might accrue points of some sort, like airfare points or hotel points, or some offer cash back.

It really depends on what the program is of the credit card that you have as well. Depending on the card that you have, some of them have incentives basically to encourage you to buy things on that card, such as if you buy something with a card, you might get an extended warranty longer than the regular manufacturer warranty you might have. 

If you’re booking a trip or something on a card, you might get additional cancellation insurance or travelers insurance. It really comes down to which unique card. But some of them do have those kinds of incentives to use the card so that, again, they can charge the merchant the service fees on the card. And if you accrue a balance that you can’t pay, they’re making interest on that as well.

Wayne Kay 04:41
And a credit card is probably pretty much the best way for you to build your credit rating.

Daniel Maksymchak 04:48
Well, everything that you have for credit reports to the credit bureau for the most part, and your credit history, what you do with the credit is what builds your credit rating. So I don’t know if it’s the best way, but it’s certainly the easiest way. 

As you said, every store that you go into has a credit card that you can apply for and potentially get quite quickly, whereas you can’t go and get five cars to build your credit. But it’s quite simple to get five credit cards to build your credit if that’s your goal.

Wayne Kay 05:14
But if you’re starting out and you want to build your credit rating, I don’t even think you could live without a credit card. It’s everywhere. You want to stay somewhere, you want to book a hotel, you want to do anything, you have to have a credit card.

Daniel Maksymchak 05:29
Yes. It is the way things are going now, with more and more reservations and purchases happening online. A credit card is often the only way to make those purchases. I know that some banks now will have tied to your debit card, Visa Debit or Mastercard Debit, something like that, so that you can pay it through those networks out of your bank account.

And some merchants will take that. I know there’s Interac debit online that you can use again where you’re paying your own money out of your account as opposed to a credit card that you’re going to get a bill for. 

But there are some places that require a regular credit card because they need to put a charge on it, like a hold. In case you damage your hotel room or something like that.

In your bank account, you might not have sufficient funds in there to cover that. Whereas on a credit card, as long as you have sufficient room left, then they can put that on it. So some prefer that.

Wayne Kay 06:17
And then there are these little incentives. If I buy this, buy gas, then I get some money off groceries and things like that. So there are some advantages, for sure, some positive things to it.

Daniel Maksymchak 06:33
Yes, as long as you can pay that bill every month. But if you put things on the credit card and there’s interest being charged, the cost of that interest is quickly going to outweigh the benefit of any additional points or warranties that you might have got by putting that card on that charge on the card in the first place.

Wayne Kay 06:48
Daniel, you see a lot of people come into your office, they’re in financial trouble. How important or how do credit cards play into the trouble for most families?

Daniel Maksymchak 06:58
It’s definitely the primary form of debt that we see in most people, I would say, in terms of their unsecured, like non mortgage debt. And I think it comes back to, as you said, off the top, they’re so readily available. Every store has them. 

There’s ads online, there’s different ways that you can apply for the cards, and it’s consistently in your face, more or less. So when people are having trouble meeting their budget or they need extra cash, essentially, that’s kind of the first route that they turn to, I would say, because it’s the most readily available.

But the trouble with that is, as I said, it’s tough to use that to finance things because the interest rate is so high. So if you’re trying to use it to stretch out your budget, you’re taking money from the future to fill your needs now. If  you have an emergency, something comes up, you got to do it. 

But then when you’re stuck at paying 20 or 25% interest rate on that, it can quickly snowball to a point where if you didn’t have the money to buy what you were going to buy last month. You’re probably not going to have the money to pay back what you bought plus interest the next month.

Wayne Kay 08:03
Right.

Daniel Maksymchak 08:04
Depending on the circumstances of what led to that additional spending.

Wayne Kay 08:08
So looking into the crystal ball, if somebody starts using the credit card and starts missing, not able to pay it, maybe just being able to pay the absolute minimum, which is really low. 

We know why the banks do it, but it’s insane how low the minimum payment can be. What do we need to look for when this is going to become a problem?

Daniel Maksymchak 08:34
It becomes a problem. I mean, mathematically, it becomes a problem when you can’t repay the debt that month, and you’re starting to accrue interest. But things happen. You have to stretch your budget for one month, and some unexpected expense comes up. Okay.

But then you have to be able to come up with a plan to be able to pay off that credit card in the near future to minimize that amount of interest that you have accruing there. That’s when it’s an issue when you’re paying that high interest of credit card interest that’s accumulated on that debt.

Wayne Kay 09:07
I remember once upon a time, and they may even do this, the bank would send something saying, hey, if you use this card, you can transfer over your debt from another card and then it’ll be at a low interest rate for three months or six months. Do they still do that?

Daniel Maksymchak 09:22
Yes. Those are called balance transfer offers. So sometimes those still exist because the credit card companies, they’ve looked at your situation, they think that you’re a relatively low credit risk, so they’re willing to take that debt on for a relatively small amount. 

And then I guess they’re hoping that instead of paying interest on that debt to your current bank or credit card company, that once that grace period runs out, where it’s a free balance transfer, it’s always for a fixed period of time. It’s not interest free forever.

Wayne Kay 09:53
Right.

Daniel Maksymchak 09:53
So once that period of time runs out, then they’re hoping that you’ll be paying the interest to them instead of where you were paying it before. And banks make a lot of money on interest as long as at the end of the day, the debt is eventually paid off. yes.

Wayne Kay 10:05
So if you see that your credit card is becoming a problem, what do you do?

Daniel Maksymchak 10:10
Well, when you’re at the point where you’re only making the minimum payments and I mean the minimum payments are really, as you said, usually only a very small portion of the amount that you owe.

A few years back there was a requirement where credit card companies now have to put on the statement, if you only make the minimum payment, how long is it going to take you to pay back this debt? Because a lot of people were thinking that, oh, I’m paying the minimum payment, it’ll eventually get paid off. I’m doing fine with my credit card payments. 

But now with this disclosure, we see people –  you’ve put $5,000 on your credit card because you’ve had to do car repairs or something like that. And if you only make the minimum payments to pay that off, it could take you, depending on the interest rate in the card, it could take 50 plus years to pay off this one bad month that you’ve had if you’re only paying the minimum payment.

So if you’re in that position, you really need to look at your budget. Is there anywhere that you can cut back to free up money so that you can aggressively pay off that credit card so that you’re not having that high credit card rate of interest each month impacting your expenses? And if you review your budget and there’s nowhere to free up enough money to pay that off in the relatively near future, you might have to look at is there a way to convert that credit card debt to a form of debt that has a lower rate of interest? So it might be maybe a balance transfer, like you mentioned earlier, if that’s available to you.

It might be if you have a line of credit or a home equity line of credit, something like that, that it’s a lower rate of interest, maybe you use that to pay off the credit card debt. And now instead of paying 20% on the credit card, maybe you’re paying 10% on your home equity line of credit or something like that, which of course will allow more of your payments to go towards principal and pay it off faster. 

But if those things aren’t available to you and there’s no room to free off your budget to pay that off anytime soon, then that’s maybe when you need to speak to an LIT and determine is there any other options out there that will help me to get out of this credit card debt as fast as possible so that I’m not spending hundreds and thousands of dollars on interest over the years until I can finally pay this off.

Wayne Kay 12:11
And it really snowballs quickly, doesn’t it?

Daniel Maksymchak 12:15
It sure does, yes. I mean, with those interest rates, like I said, one bad month can snowball into a lifetime of payments if you can only afford the minimum payment each month.

Wayne Kay 12:24
No kidding. Is it better to, I don’t even know if this is a real question. Is it better for each person to have their own individual card or if you’re married, can I be the supplements on my wife’s card?

Daniel Maksymchak 12:38
You can be. Convenience wise, that’s probably easier. You get one bill, both charges go on to one bill, and you pay one bill at the end of the month when it comes in. But where it becomes a problem is if that bill gets high enough that it can’t be repaid.

A lot of credit card companies will have in the fine print of the supplementary card agreements that, okay, Wayne has a card, he applies for a card, a supplemental card for his spouse. His spouse charges on that card, and by doing so, the spouse is agreeing to become jointly liable for that debt. 

So if Wayne can’t pay the debt, they’re going to be looking at the spouse to pay that debt. So now your spouse has accepted responsibility for that debt, perhaps unknowingly, just because they have that supplemental card. So it’s more convenient. But the downsides start to happen if the debts can’t be paid, and then that’s further complicated. 

Let’s say if there were two spouses on a card and there was a marital breakdown, then you’re both jointly responsible for that debt. And it’s one thing to agree, okay, well, you pay this card, I’ll pay that card. But then if the other person doesn’t hold up their end of the deal, the bank doesn’t care about this arrangement that you have.

They have the right to come after you for the amount they’re not getting on this card, and they’re going to do so. So you’re tied to that person until that card is paid off. yes.

Wayne Kay 14:02
That’s a good point, though. When things go sideways, that’s when it’s almost hard to go back at that point and say, well, maybe we shouldn’t have done the supplemental card. And then obviously the strain of the relationship at that point is also not going to be very good. Do you typically find – when is it individuals who come in for Bankruptcy, Consumer Proposals, or is it couples? What do you find?

Daniel Maksymchak 14:29
It’s all sorts. You get couples who come in and they end up filing Consumer Proposals separately. They might come in and if they have a lot of joint debt, there is the option for them to file a Consumer Proposal jointly.

It might be that two people have entered into a new relationship together and one is carrying a lot of debt from earlier in life, and then they would file a proposal and there’s no need for the second person to. It varies greatly depending on where people are in their lives and what’s happened in their lives up till that point.

Wayne Kay 14:57
Okay, so your final words of wisdom when it comes to credit cards and the problems. What do you have for us?

Daniel Maksymchak 15:04
Yes, they can be a great tool, on the face of it, they’re very useful. They allow you to combine multiple charges onto a single bill that you get each month. You make one payment from your bank and you’re done. You might get additional points, you might get additional warranties or benefits from using that card as long as you can pay it off at the end of the month.

That hasn’t cost you anything to get those various benefits. Where it comes into trouble is when there’s interest to be paid. So if you’re going to use a credit card, don’t buy anything on the credit card that you don’t have the cash to cover if you can help it, of course. 

And if you do have to carry a balance month to month, you’ve really got to make a plan to pay that debt off as fast as you can, because the interest rate on those cards is very high and they’re really going to restrict your ability to live going forward. 

And if you’re unable to come up with a plan to pay that off anytime soon, that’s where you need to call an LIT and look at what other options there are out there, such as a Consumer Proposal that will help you to pay off the card over time through an amount that you can afford. At the end of the proposal, you’re debt free from that card and your unsecured debts and you can carry on with life going forward from there.

Wayne Kay 16:15
Just before I let you go, is there one thing you should never do if you are in a bad financial situation because of that credit card? Is there one thing that people come in and they say, well I did this and you’re like, oh, I wish you didn’t do that?

Daniel Maksymchak 16:29
Yes, that’s a good question. There are some assets that are protected from creditors, so they’re not taken into account in the calculation when determining what’s a reasonable offer to your creditors in a proposal.

So a good example of that is RSPs. So RSPs in Manitoba are entirely exempt from seizure by creditors in a Bankruptcy. They don’t have to be offered to the creditors in a consumer proposal typically. So people have debts, they go and they want to pay off those debts honorably. They cash in their RRSPs, they use it to pay off their debts.

Now they’ve got a big tax bill for taking out those RRSPs and the RRSPs are gone. So they might end up having to file a Consumer Proposal anyways because of the tax debt. But now they’ve lost their RSPs and they’ve really hurt their retirement prospects going forward as well. 

So the sooner that you can identify that you have a problem and you talk to an LIT and figure out the options that are available to you and how your assets are treated, it’s better to at least speak to someone before you go cashing in assets that might have otherwise been exempt.

Wayne Kay 17:29
Right. And that first consultation is free and they can do that through your website, LCTaylor.com. Daniel, thanks very much for being on the show.

Daniel Maksymchak 17:41
Thanks for having me, Wayne. That was a great conversation.

Wayne Kay 17:43
My guest today, Daniel Maksymchak from LCTaylor Licensed Insolvency Trustee. 

And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, if you want more information, you can always check out debtmatters.ca. Thanks for listening.