Credit card debt has become a fact of life for most Canadians and Americans. The unfortunate reality in our society is that most people are not able to pay off their debts. According to David Trahair, in his recent book Crushing Debt, the average Canadian has approximately $25K in household consumer debt (credit cards and lines of credit). This amount was provided from a TransUnion independent report, and is in addition to any mortgage debt. It’s likely a similar scenario for Americans as well.
The TransUnion report also indicated that Canadians were using their lines of credit (LOC) and Home Equity Lines of Credit (HELIOC) to pay off their credit cards. In other words, many Canadians continued to use their credit cards and simply shifted the balance to the line of credit with its lower rate. Although Lines of Credit offer substantially lower rates than credit cards, the frightening fact is many Canadians and Americans are continually carrying a balance on their credit cards. For those who don’t have secured lines of credit, purchasing items now with the intent to pay later on their credit cards has become a way of life.
With revolving credit rates between 12% to 19%, and low minimum payments, it’s not surprising most people are not able to pay off their credit cards. That’s why it’s as important as ever, to get the best credit card that gives you the best deal. For most people, that means using a low interest rate credit card, as opposed to a fancy rewards card with overpriced perks and annual fees.
Are The Perks Worth It?
The best credit cards don’t always come with perks or travel points. If you include the annual fees, a high interest rate, and the actual dollar amount you pay for the rewards, you likely don’t come out ahead. If you don’t travel extensively, or use your credit card rewards often enough, then think twice before signing up for one.
Reward cards often have annual membership fees (over $100 for gold cards), and if it’s a MasterCard then your likely paying the higher %19 rate. Combining a membership fee with a high interest rate, means you are simply paying too much for your rewards if you don’t pay off your balance.
In addition, the reward points by most credit cards tend to have a ratio of 10 to 40 for each dollar spent. This means you need to spend $10 to $40 for every $1 of rewards. For example a flight from Vancouver to San Francisco return, would currently cost me around $400 CAN. If was to use my Air Miles AMEX rewards card, with a 15:1 point ratio, then my ticket to San Francisco just cost me $6000! In other words, by using my credit card, I had to spend $6000, to be able to get enough points to redeem for a flight worth $400.
Low Rate Cards Are a Better Deal
If you are the person who does indeed use your travel or reward points, and you can pay off your credit card in full every month, then it’s a good deal. You are getting a great kickback on money you are spending anyway. But if you carry any kind of balance, or unable to pay off your credit card every month, then you really should look into the low rate credit cards. While you won’t be getting the nice perks or rewards, you won’t be over-paying for them either. 😉
Readers, what are your thoughts? Do you like your credit card rewards, or do you prefer the lower rate cards?