Lose the plastic

At the end of the first quarter of 2012, the average Canadian owed an incredible $26,029 in consumer debt. With interest rates likely staying put until 2013 and our seemingly insatiable desire for more stuff, there’s a real concern that number will continue to increase.

Consumer debt can be broken down into a few simple categories: credit cards, lines of credit, installment loans (other than mortgages) and auto loans. But of the various types of consumer debt Canadians carry, credit card debt is perhaps the most troubling. Although it only accounts for about $3,500 or 14% of our average debt load, the interest rates charged on that debt are exorbitant—often as much as 20%.

High interest rates on credit cards make it nearly impossible for consumers to pay off their card in full. For instance, consider what a 20% interest rate means for the average credit card balance of $3,500. If you were to only make the minimum payments on that debt then you would tack on $700 to your bill in interest alone at the end of the year. More importantly, if you were to make only minimum payments it would take 242 months, or 20 years, and accrue more than $5,000 in interest before you paid it off in full.

There are ways to get that debt under control, but some have simply cut up their credit cards to avoid the lure of easy money—and not always by choice.

It’s easier said than done. Kim, a Barrie, Ont.-based single mom can attest to that. Seven years ago Kim, who asked that her first name be used, racked up $28,000 on her credit card before her credit counselor told her to cut it up. “It’s very annoying,” she says about living without a credit card. “You don’t feel like a complete adult anymore.”

Of course, being on the verge of bankruptcy Kim didn’t have a choice. Kevin Kotyk on the other hand did. The 29-year-old Winnipeg-based liquor mart employee never owned a card and has no plans to sign up for one either.

It can be frustrating to not have a card. Simple things like booking a hotel or buying something online suddenly become challenging, if not impossible. Still Kotyk makes it work. He doesn’t travel much—when he does it’s business-related—and he doesn’t make any grand purchases.

Most of Kotyk paycheques go to savings. He has a TFSA, an RRSP and an online brokerage account. The rest of his money goes towards daily expenses and the occasional splurge. He usually keeps about $100 in his wallet and he has between $2,000 and $3,000 in his chequing account at all times. And if he does need to make a pricey purchase, he saves for it.

David Trahair, author of Crushing Debt: Why Canadians Should Drop Everything And Pay Off Debt, thinks that living without a credit card can make sense for some people, especially for those who can’t control their spending. But, he says, “using only cash is very difficult.”

It’s never a good idea to carry around wads of dough, he says, and what happens if you don’t bring enough to the grocery store? “I understand why someone might do this,” he says, “but it’s hard to do.”

Credit cards do have some benefits, explains Trahair. For instance they allow you to easily track spending with great precision. With cash it’s extremely hard to know where your money is going unless you write down where you spend every dollar.

Credit cards also often come in handy when there’s an emergency or if you need to buy something expensive, like a new appliance. People don’t need to put everything on their credit card, says Trahair, but it’s unrealistic to think that all of us indebted Canadians can simply lose our plastic and expect to spend less.

“Getting rid of the card is extremely drastic and unlikely to happen,” he says. “If the roof falls in and you’re cut off of all your credit, then what do you do?”

He says it’s more important to find ways to change behaviours than to shock people into reducing their debt. For instance, look at your credit card statement and figure out where you can reduce spending, he says. Use that data to create a financial plan that you can stick to.

That wouldn’t have worked for Kim. She was using her card to buy almost everything, including day-to-day items like groceries. While getting rid of her card was tough, it did transform the way she spent and how she looks at money.

“I learned how to stretch a dollar and how to budget way better,” she says. She’s had to live frugally to make it work. She shopped at cheaper grocery stores, she takes transit to save gas and she looks for sales. “You get a lot more resourceful and learn a lot of different things you didn’t know before,” says Kim.

Canadians are getting the message—albeit slowly. The average credit card balance is down about 2% from last year, according to the latest report from TransUnion. Quarter over quarter it’s down nearly 5%. Still there’s a long way to go.

In two years, when Kim’s finally debt free, she may sign up for another card. This time, though, she’ll only get one with a small limit—no more than $2,000. When she does have a credit card again she says she will probably use it to buy the things that have to be put on plastic, like the deals she finds on websites like Groupon, but mostly she plans to leave it at home.

“I used to use my card for everything. I’d pull it out at restaurants, for instance,” she says. “If I got another one I’d definitely leave it behind when I went out. There’s no way I’d bring it with me.”