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Loans and borrowing

Credit card: friend or foe?

October 3, 2016
Marie-Christine Daignault
Desjardins Group

Young people are more likely to get into credit card debt than other credit cardholders. 

Certain age groups are more vulnerable to credit card debt. True or false? There are many stereotypes associated with credit and debt. Test your knowledge!  

No 1. Young people get into debt more than any other age group. 

False. In fact, no age group is particularly affected by over-indebtedness due to credit card use. Similarly, if you have a high income, it doesn't guarantee that you won't overspend and get into debt. You can only avoid that by maintaining the right balance between your financial obligations and your ability to pay. 

However, 70% of all cardholders pay off their entire balance within the 21-day grace period while a portion of the remaining percentage reimburses the minimum amount due.  

No 2. A credit card helps build a good credit report. 

True. As long as you use it properly. 

The credit report gives an overview of your spending behaviour; it even shows if you're paying off your debt in time and if you've ever made late payments. If you use your credit card smartly, you're building your credit history which potential borrowers have access to.  

To a lender, using a credit card smartly means always paying off the full amount owing without incurring any interest or on time by settling at least the minimum amount due.

No 3. Having several credit cards affects the credit report. 

False. And true! Ideally, you shouldn't have more than 2 cards. Because most businesses today accept the most popular cards, there's no need to own a few "just in case." In fact, it's easier to manage one card only as it means you only have one account statement and one credit limit to manage and only one transaction follow-up to do. With several cards, it's hard to get an overall view of your budget and that can be risky. Excessive debt is often the result of using a few different methods of financing, including credit cards.  

Consumers today are better informed and own on average 2 credit cards per person. 

No 4. Increasing your credit limit is a good thing.

False. If you increase your limit regularly or have a very high limit (or own several credit cards), a borrower may deem that you're more likely to go into debt and will therefore be more reluctant to give you a loan.  

No 5. There's no interest when you pay off the minimum amount on time.

False. By the time you receive the account statement for your credit card, Desjardins would have paid off some your purchases a month prior. You then have a 21-day grace period during which Desjardins is still paying off your purchases.  

So, if you don't make a payment after the grace period, interest on all card purchases will be calculated from the date of purchase, up until you pay off the transactions. But, what many people have got wrong is that, if there's a partial reimbursement, interest is only calculated daily on the remaining balance. That's why, if you haven't paid off the minimum amount, you're better off settling the balance before you get your next statement.  

No 6. Interest is calculated on cash withdrawals right from the date of withdrawal. 

True. Just like with a debit card, you can withdraw cash using your credit card. The difference is that you're not technically withdrawing funds from an account but you're actually borrowing money that you have to reimburse later. This transaction works like a loan and interest is calculated as of the date of the transaction.   

If you're travelling, you have the option to make an advance payment on a credit card, which would be the same as withdrawing cash without interest.  Be careful though! If you're still using your card to make purchases, those are the transactions that will be debited first. So if they reach or exceed the advance payment amount, the first cash withdrawal will then become a cash withdrawal with immediate interest. 

The prepaid card is a good option for withdrawing cash since it's your money that's in the account linked to the card. This means that there is no loan transaction and no interest is calculated on withdrawals. The card is reloadable and you can use it again if you redeposit some money to your account.  

No 7. Anyone can have a credit card. 

False. If you can't manage your budget or resist impulsive buying, you should not have a credit card. A credit card isn't money that you have; it's the option to pay for a purchase later so you must make sure to have that money by the time you need to pay it off.