What Are Credit Card Interest Rates?

Credit card interest rates are the costs you pay to borrow money on your credit card when you carry a balance month to month. Most Canadian credit cards charge interest rates between 1% and 29.99%, but some cards may have rates outside this range.

Annual Percentage Rate (APR) Explained

The annual percentage rate shows how much credit card companies charge for borrowing over a year. Your APR indicates the extra cost you’ll incur when you don’t pay off your credit card balance in full each month.

Credit card companies convert the annual rate into a daily or monthly rate to calculate the interest charges on your statement. For example, if your card has a 19.90% APR, your issuer divides this by 365 to get a daily rate of approximately 0.0545%, which they apply to your outstanding balance each day.

You only pay interest when you carry a balance past your payment due date. If you pay your full statement balance by the deadline, no interest charges apply. However, if you don’t pay the full balance, interest accrues from the date of purchase.

Types of Credit Card Interest Rates

Credit cards apply different interest rates depending on the type of transaction you make. Purchase rates apply to regular shopping transactions and typically range from 19% to 29.99% in Canada. 

Cash advance interest rates are typically higher than purchase rates and begin accruing interest immediately, with no grace period. There may also be a fee for making a cash advance, which could be either a fixed amount or a percentage of the withdrawal.

Balance transfer rates may be offered at promotional rates initially, then revert to the standard rate after the promotional period ends. For example, 0% interest for 10 months, then 12.99% thereafter. A balance transfer fee may also apply.

Some cards focus on offering low-interest rates as their main feature, which can be helpful if you expect to carry a balance. Your particular rate depends on the card you select.

How Credit Card Interest Is Calculated in Canada

Credit card companies in Canada calculate interest daily and add it to any balance you carry past your payment due date. The annual percentage rate is converted to a daily rate, which then compounds over time on both your original balance and accumulated interest charges.

Daily Interest Compounding

Your credit card’s annual interest rate gets divided by 365 to determine your daily interest rate. If your card has a 19.90% APR, your daily rate equals approximately 0.0545%.

This daily rate applies to your outstanding balance each day. The interest charged today gets added to your balance, and tomorrow’s interest calculation includes that new total. This compounding effect means you pay interest on interest, which speeds up how quickly your debt grows.

The calculation happens automatically every day you carry a balance. Your credit card issuer tracks these daily interest charges and lists the total amount on your monthly statement. This daily compounding system explains why credit card debt can increase rapidly if you make only minimum payments or miss due dates.

Interest on Outstanding Balances

Interest charges only apply if you carry a balance beyond your payment due date. Paying your full statement balance by the due date means you won’t pay interest during the grace period.

Once you miss that deadline, interest begins to accrue on your entire credit card balance. The charges keep adding up daily until you settle what you owe. 

Your monthly statement shows the interest charged during that billing cycle. Different transaction types on your card may have different interest rates. Cash advances typically carry higher rates than regular purchases and start accruing interest immediately without any grace period.

Credit Card Interest Calculator Overview

A credit card interest calculator helps you estimate how much you’ll pay in interest charges based on your balance, interest rate, and payment amount. You input your current balance, APR, and planned monthly payment to see the total cost.

These calculators show you how long it takes to pay off debt and how much interest accumulates over time. Many Canadian banks and financial websites offer free calculators that demonstrate the impact of making only minimum payments versus larger amounts.

The calculator reveals the true cost of carrying a balance. For example, a $5,000 balance at 19.90% APR with minimum payments could take years to pay off and cost thousands in interest charges alone.

Grace Periods and How They Work

Most Canadian credit cards provide an interest-free period after your billing cycle ends, usually lasting 21 to 30 days. This grace period only applies if you pay your balance in full each month and does not cover cash advances.

Interest-Free Grace Period

The grace period begins on the last day of your billing cycle and continues until your payment is due. During this time, you won’t pay interest on new purchases if you’ve paid your previous balance in full.

Credit card issuers in Canada usually offer a grace period of 21 to 30 days. Some business credit cards may have a longer grace period. The exact duration depends on your card issuer and the terms of your agreement.

Note that if you miss two payments in a row, your interest rate may immediately go up, and your credit score could take a hit. 

How the Grace Period Affects Purchases

When you make a credit card purchase during an active grace period, that transaction won’t accumulate interest until after your payment due date passes. This means you’re essentially borrowing money for free.

To keep your grace period active:

• Pay your full statement balance each month
• Avoid cash advances, which typically have no grace period
• Make payments before the due date on your credit card statement

If you make only the minimum payment or carry a balance, your credit card purchases accrue interest from the date of purchase. You’ll need to pay two consecutive statement balances in full to restore your grace period benefits.

Different Types of Credit Card Interest

Credit cards in Canada charge different interest rates depending on how you use them. Purchase interest applies to regular transactions; cash advance rates apply when you withdraw money; and balance transfer interest affects the amounts transferred from other cards.

Purchase Interest

Purchase interest is the most common type of credit card interest you’ll encounter. This rate applies to everyday transactions like groceries, gas, and online shopping.

In Canada, purchase interest rates typically range from 19% to 29.99% annually. The interest rate is set before and is clearly visible when you apply. However, if you miss multiple payments, your interest rate could rise.

You can avoid purchase interest entirely by paying your full statement balance by the due date each month. Most cards offer a grace period of 21 days between your statement date and payment due date, where no interest accrues on new purchases.

Once you carry a balance past the due date, interest accrues daily on your outstanding amount. The interest compounds, meaning you pay interest on both your original balance and previously charged interest.

Cash Advance Rates

Cash advances involve withdrawing money from your credit card at an ATM or bank. This is one of the most costly ways to access credit, so it should only be used in emergency situations.

Cash advance rates are typically higher than purchase rates, often ranging from 22% to 30% annually. There’s no grace period for cash advances. Interest starts accumulating immediately from the day you take the withdrawal.

Your credit card issuer also charges a cash advance fee, typically 3% to 5% of the amount withdrawn or a minimum flat fee. Any payments you make are applied to lower-interest balances first, so your cash advance balance remains outstanding longer and incurs higher interest.

Balance Transfer Interest

Balance transfers let you move debt from one credit card to another, often to take advantage of lower rates. Some credit card issuers offer promotional rates between 0% and 8.99% for balance transfers, lasting anywhere from 6 to 12 months.

After the promotional period ends, the rate reverts to your card’s standard interest rate. New purchases made on a balance transfer card are charged at the regular purchase rate, not the promotional rate.

Payments you make are applied to the transferred balance first, not to new purchases. This means new transactions accumulate interest at the higher standard rate while you pay down the transferred amount. Most issuers charge a balance transfer fee of 1% to 3% of the amount transferred.

The Impact of Payments and Fees

How you manage credit card payments directly affects the interest you pay and whether you incur additional charges. Your monthly statement shows not only your balance but also the minimum payment required and any fees incurred.

Minimum Payments and Their Effect

The minimum payment is the smallest amount you can pay each month without defaulting on your credit card account. This amount usually ranges from 2% to 5% of your outstanding balance or a fixed minimum dollar amount, whichever is higher.

Paying only the minimum keeps your account in good standing and avoids late fees, but it significantly increases the total interest you pay over time. When you make minimum payments on a balance, most of your payment goes toward interest charges rather than reducing your principal balance.

Your credit card statement shows how long it will take to pay off your balance if you make only the minimum monthly payment.

Late Fees and Penalties

Missing a payment deadline could result in late fees that typically range from $25 to $50. These fees appear on your next monthly statement and add to your outstanding balance, which then accrues interest charges at your card’s rate. If you accidentally forgot to pay, you could call your bank and ask them to waive the fee as a goodwill gesture.

Late payments can also trigger penalty interest rates, which are substantially higher than your regular purchase rate. Your payment history affects your credit rating, and missed payments remain on your credit report for up to six years. Setting up automatic payments for at least the minimum amount helps you avoid these unnecessary costs.

Strategies to Manage and Reduce Credit Card Interest

Reducing interest payments requires disciplined payment habits, strategic use of financial tools, and awareness of high-cost features. The most effective approach is to pay your full balance each month, transfer existing debt to lower-rate options when beneficial, and avoid costly cash advances that accrue interest immediately.

Paying Off Balances in Full

Paying your entire balance before the due date eliminates interest charges on credit card purchases completely. 

Setting up automatic payments from your bank account ensures you never miss a due date. You can schedule these payments for the minimum amount, statement balance, or full balance, depending on your personal financial situation.

If paying the full amount isn’t possible, always pay more than the minimum required payment. 

Using Balance Transfers Effectively

A balance transfer moves high-interest debt from one or more credit cards to another card with a lower promotional rate. Some Canadian credit cards offer introductory rates between 0% and 8.99% for 6 to 12 months on transferred balances.

You’ll typically pay a one-time transfer fee of 1-3% of the amount moved. Calculate whether the interest savings outweigh this fee before proceeding. For example, transferring $5,000 at a 3% fee costs $150 upfront but could save you hundreds in interest charges.

Create a repayment plan that pays off the transferred balance before the promotional period ends. Once the introductory rate expires, the regular interest rate applies to any remaining balance. Avoid making new purchases on the balance transfer card, as these transactions usually carry the standard interest rate, and payments are generally applied to lower-rate balances first.

Avoiding Cash Advances

Cash advances are withdrawals made using your credit card at ATMs or bank branches. These transactions cost significantly more than regular credit card purchases due to immediate interest accumulation and additional fees.

Because the cost of cash advances is so high, it’s best to avoid them entirely. Aim to build an emergency fund covering three to six months of expenses to ensure you have a safety net to rely on.

Final Thoughts

No matter how you look at it, carrying a balance on your credit card is expensive due to the interest rate. While avoiding credit completely is likely not possible, you should always strive to make full payments each month.

This guide cuts through the noise. You’ll learn how credit scores really work, how to kickstart your credit journey, and how to dodge the traps that wreck your financial reputation. Let’s turn your credit from invisible to impressive.

Understanding Credit in Canada

Credit bureaus in Canada (Equifax and TransUnion) use a numerical scoring system that tracks your borrowing and repayment behaviour. This score is determined by analyzing your credit habits and applying them to their internal algorithms. Having a good credit score is crucial because it demonstrates to lenders your level of financial responsibility.

What is A Credit Score

A credit score is a three-digit number ranging from 300 to 900 that represents your creditworthiness. In Canada, scores are calculated using information from your credit report combined with additional factors.

Credit score ranges include:

• 760-900: Excellent
• 725-759: Very Good
• 660-724: Good
• 560-659: Fair
• 300-559: Poor

Your credit score impacts your ability to get loans, credit cards, mortgages, and rental applications. Higher scores result in better interest rates and more favourable terms.

Note that the range of scores can be quite broad. Someone with a credit score of 775 is essentially on the same level as someone with a score of 885. While it’s important to maintain a good credit score, you shouldn’t obsess over it.

How Credit Works

Credit works as a system of trust between you and lenders. When you borrow money or use credit products, your payment behaviour is reported to credit bureaus on a monthly basis.

Key factors affecting your score:

• Payment history (35%): On-time payments boost your score
• Credit utilization (30%): Keep balances below 30% of limits
• Credit history length (15%): Older accounts improve your score
• Credit mix (10%): Different types of credit show responsibility
• New credit inquiries (10%): Too many applications can lower your score

Lenders review your credit report before approving applications. They examine your borrowing patterns, current debts, and repayment reliability to assess risk.

Types of Credit Products

Canada offers several credit products that help build your credit history when used responsibly.

Revolving Credit:

• Credit cards
• Lines of credit
• Home equity lines of credit (HELOCs)

Instalment Credit:

• Personal loans
• Auto loans
• Mortgages
• Student loans

Secured Credit Products:

• Secured credit cards (require a deposit)

Credit cards are the most accessible starting point for newcomers and young adults. Secured credit cards are a good option if you cannot initially qualify for traditional cards.

Each product type contributes differently to your credit mix. Having both revolving and installment credit demonstrates your ability to manage various financial responsibilities effectively.

Key Factors Affecting Credit Scores

Your credit score in Canada is calculated using five primary components that credit bureaus analyze from your credit history. Payment history carries the most weight at 35% of your score, while credit utilization accounts for 30%.

Payment History

Payment history is the most significant factor in calculating your credit score, making up 35% of the total. This part monitors whether you pay your bills on time and in full. Generally, a single missed payment won’t make a difference, but two consecutive missed payments or two in a 12-month period could significantly impact your credit score. These negative marks can substantially lower your score and can stay visible for up to six years.

Types of payments tracked include:

• Credit card minimum payments
• Loan payments (personal, auto, mortgage)
• Line of credit payments
• Utility bills reported to credit bureaus

Missing payments establish a pattern that lenders see as high risk. The more recent the missed payment, the stronger the negative effect. Multiple missed payments increase the damage and indicate financial trouble to potential lenders.

Credit Utilization

Credit utilization indicates the percentage of your available credit that you’re using. This factor accounts for 30% of your credit score and is the second most significant component.

Your utilization ratio is calculated by dividing your current credit card balances by your total credit limits. For example, if you have $2,000 in balances across cards with a total limit of $10,000, your ratio is 20%.

Optimal utilization guidelines:

• Keep total utilization below 30%
• Aim for individual card utilization under 30%
• Target utilization of 10% or less for best scores

Using more than 30% of your available credit indicates a heavy reliance and potential repayment risk, even if you consistently make minimum payments. Lenders take notice so keep your utilization ratio low. 

Length of Credit History

Credit history length makes up 15% of your score. It’s based on how long you’ve had credit and the average age of all accounts, including closed ones. Opening new accounts frequently can reduce your average account age. That’s why keeping older accounts open, even if they are unused, often benefits your credit score.

Key components measured:

• Age of oldest account
• Average age of all accounts
• Time since account activity

Closed accounts remain part of your credit history for up to 7 years before they are removed from your report. This offers some protection when you close older cards.

Students and newcomers to Canada naturally have shorter credit histories. Building this factor requires patience and consistent credit management over several years.

Recent Applications

Recent credit applications, also called hard inquiries, represent 10% of your credit score. Each application for new credit triggers a hard inquiry that appears on your credit report. Making multiple hard inquiries within a short period suggests you’re seeking credit urgently, which lenders don’t like.

Hard inquiries occur when you apply for:

• Credit cards
• Personal loans
• Auto loans
• Mortgages
• Lines of credit

Each hard inquiry typically reduces your score by 10  points. The impact diminishes over time. In other words, if you practice good credit habits, your credit score will rebound.

Credit Mix

Credit mix accounts for 10% of your credit score and examines the variety of credit types in your profile. Lenders prefer seeing that you can manage different forms of credit responsibly.

Common credit types include:

• Revolving credit (credit cards, lines of credit)
• Installment loans (mortgages, auto loans, personal loans)
• Retail accounts (store credit cards)

A mix of revolving and installment credit shows financial versatility, but it matters less than payment history or utilization. Don’t open accounts just to boost your mix. Stick to credit that fits your needs. A balanced profile builds naturally over time.

Steps to Start Building Credit

Building credit in Canada involves establishing financial products in your name and showing responsible payment behaviour. The three main methods include credit cards, cellular services, and loans, each providing different ways to build your credit history.

Applying for a Credit Card

Credit cards serve as the primary tool for establishing a credit history in Canada. Most major banks offer credit cards specifically designed for newcomers, students and those without existing credit.

Secured credit cards require an upfront deposit that typically matches your credit limit. If you deposit $500, your credit limit becomes $500. This deposit protects the lender while allowing you to build credit history. These are essential for people who can’t access traditional cards.

Getting a Cellular Service in Your Name

Cellphone plans impact your credit history when payments are reported to credit bureaus. Major Canadian providers like Bell, Rogers, and Telus report payment activity to Equifax and TransUnion.

Contract plans usually need credit checks and help build credit more effectively than prepaid options. Post-paid monthly billing establishes a consistent payment history when paid on time.

Opening a Loan

Small personal loans or lines of credit demonstrate your ability to manage installment debt. Credit unions often provide more flexible lending options for those establishing credit.

Personal loans require fixed monthly payments over set terms. Start with smaller amounts like $1,000 to $3,000. Use the funds for necessary purchases or place them in savings while making payments.

Smart Credit Management Practices

Effective credit management involves regular payment habits, strategic use of available credit, and consistent monitoring of your credit history. These practices directly impact your credit score and influence your access to future financial opportunities.

Making On-Time Payments

Payment history makes up 35% of your credit score. Missing payments can drop your score by 60–100 points. Set up automatic minimum payments to avoid late fees, and pay your full balance when possible to skip interest and show strong financial habits.

Key payment strategies:

• Schedule payments 2-3 days before due dates
• Use banking apps to set payment reminders
• Pay twice monthly to reduce average balances

Late payments remain on your credit report for six years in Canada. A single missed payment can affect your score for months.

Managing Credit Limits and Balances

Aim to keep credit usage below 30% per card. Once you’ve established a solid payment history, request annual credit limit increases. Higher limits result in lower utilization, even if your spending remains the same.

Utilization management tips:

• Pay down balances before statement dates
• Spread purchases across multiple cards
• Ask for limit increases every 6-12 months

Avoid closing old credit cards unless they carry annual fees. Keeping accounts open maintains your credit history length and available credit.

Monitoring Your Credit Report

Check your credit report from both Equifax Canada and TransUnion Canada annually. You can access free and paid reports through their official websites.

Look for errors in personal information, account details, and payment history. Dispute inaccuracies immediately as they can lower your score unfairly.

What to review monthly:

• Payment history accuracy
• Account balances and limits
• New accounts or inquiries
• Personal information updates

Think about signing up for credit monitoring services that notify you of any changes in your report. These services help you identify identity theft or errors on your report quickly.

Rebuilding Credit After Setbacks

Credit setbacks like missed payments and collections can lower your credit score, but recovery is possible through strategic actions. Secured credit cards offer a dependable way to show responsible credit use while you work on past issues.

Recovering from Missed Payments

Late payments remain on your credit report for six years in Canada. However, their impact decreases significantly after two years of consistent on-time payments.

Contact your creditors immediately when you realize you’ll miss or have missed a payment. Many lenders will be understanding and can work with you to find a solution that won’t affect your credit score.

If you’ve already missed payments, focus on these recovery steps:

• Make all future payments on time without exception
• Pay more than the minimum amount when possible
• Consider setting up automatic payments to avoid future delays
• Keep accounts open to maintain your credit history length

Dealing with Collections

If you’ve avoided making payments, your debt will eventually be sold off to a collections company. Collection accounts can reduce your credit score significantly and remain visible for six years from the original delinquency date.

If it gets to this points, you’ll need to negotiate with the collection agency to discuss payment options.

Consider these collection strategies:

• Verify the debt is legitimate by requesting validation
• Negotiate a settlement for less than the full amount
• Get all agreements in writing before making payments
• Keep records of all communications and payments

Never ignore collections. They won’t disappear and can lead to wage garnishment or legal action in severe cases.

Getting a Secured Credit Card

Secured credit cards require a cash deposit that becomes your credit limit. They’re specifically designed for people rebuilding credit after setbacks.

Some financial institutions offer secured cards with deposits ranging from $200 to $10,000. Your deposit is refundable when you close the account in good standing.

Key secured card benefits:

• Guaranteed approval regardless of credit history
• Lower fees than many unsecured cards for bad credit
• Graduation options to unsecured cards after 12-24 months

Use your secured card for small, regular purchases like gas or groceries. Pay the full balance monthly and never exceed 30% of your credit limit.

After six months of responsible use, your credit score should begin improving measurably.

Final thoughts

Building credit in Canada is essential if you ever need a loan in the future. Some employers and landlords may even ask you for your credit score, so it’s always best to maintain yours. By managing your credit responsibly, it should not be hard to get an excellent credit rating.

Credit cards act like an interest free loan which is great, but once your bill arrives, you need to pay it on time and in full or you could end up paying 20%+ interest.

In this article, I’m going to break down how credit card interest works so you can better understand what types of interest you may incur, and how to best avoid them. Here’s what you need to know about credit card interest.

Types of credit card interest

As you likely already know, credit card interest isn’t just one number based on one factor. There are several components to credit card interest and several types of credit card interest. It all depends on the type of credit card you have, your payment history, and the types of purchases you make.

All credit card interest rates are calculated on an annual basis. This is why when you apply for a credit card you will see the interest rate called APR which stands for annual percentage rate. However, don’t let the word annual fool you. You aren’t charged interested only once a year. That annual interest rate is broken down and then charged monthly on cardholders with an outstanding balance.

However, APR isn’t necessarily one percentage. Different credit cards have different APRs depending on how you are using your credit card. To be clear, credit card interest used a different formula compared to compound interest.

What is the purchase interest rate?

Purchase interest rate is the most common type of interest. It’s the interest you will pay on the sum of your total purchases made with your credit card should you not pay off your statement within the grace period. 

Most credit cards have a purchase APR of 19.99%, however, some do have lower rates. I’ll discuss low interest credit cards later in this article. There are also credit cards that can charge 30% interest which are known as charge cards.

What is the cash advance interest rate?

Most people use their credit cards to make purchases, but you can also use your credit card to take out cash from an ATM as well with the cash advance option. Keep in mind that this should only be done in emergency situations. Cash advances on credit cards come with steep interest rates that are often higher than your purchase APR.

Please note that some other transactions may be considered cash advance as well. These include wire transfers, money orders, and occasionally even lottery tickets.

It’s also worth mentioning that some credit cards allow you to withdraw money at no extra cost if you have a positive balance on your card. For example, let’s say you overpaid your bills and your account has a $500 positive balance, you could withdraw that without paying the cash advance rate.

What is the balance transfer rate?

Another interest rate offered on credit cards is the balance transfer rate. A balance transfer rate is often a low promotional interest rate used to entice those in credit card debt to open a new card. With this low balance transfer rate, those who are struggling with credit card debt can get ahead with their payments and pay off their debt faster.

However, as I said above, balance transfer rates tend to be promotional and only valid for a few months. The rate then jumps up to the credit card’s standard purchase APR. This is still a useful strategy for people looking to reduce their debt.

Take a look at this article to learn about my top picks for the best balance transfer credit cards in Canada.

What is the interest free grace period?

You might have noticed above when I was discussing purchase APR that I mentioned a ‘grace period’. So, what exactly is that?

The grace period is a period of time in which you will not be charged interest. The minimum grace period for credit cards in Canada is 21 days. However, if you don’t make your payment by the time your grace period is over, you will be charged interest on the owing balance. The grace period will still apply to new purchases even if you haven’t paid off your previous credit card debt. 

Variable interest credit cards vs. fixed interest credit cards

Another thing to take into consideration is fixed rate credit cards versus variable rate credit cards. The majority of credit cards in Canada are fixed rate credit cards. So, for example, the purchase rate APR will always be 19.99%.

However, there are a couple of variable interest credit cards on the market. These types of credit cards use Canada’s prime rate plus your personal rate depending on your credit assessment. The interest rate will fluctuate when the Bank of Canada raises or lowers the prime rate which could potentially be both good or bad.

If you do decide to go with a variable interest credit card, you’ll want to shop around to ensure that you get the best rate. The prime rate is only part of the equation. The second part of this interest equation is determined based on your credit score, income, employment history, credit score, etc. Basically, the better you look on paper, the lower rate you will be given.

What is the minimum payment?

When you get your credit card statement each month you will see a list of all your purchases, the total sum of what you need to pay off, and a minimum payment amount. The minimum payment is the smallest amount you can pay off without negatively impacting your credit score and incurring a penalty interest rate. However, this does not mean you are excluded from paying interest. Interest will still be charged on any amount owing after the grace period, whether you made the minimum payment or not.

To stay in good standing, you have to, at the very least, pay off the minimum payment. Again though, it’s best to pay off the entire owing balance every month to avoid being charged interest.

How do penalty interest rates work?

If you don’t make your minimum payments each month you can incur an additional interest known as penalty interest. Penalty interest rates depend on the credit card (you’ll have to read the fine print for your specific credit card) but can be as high as 30%. Normally, you won’t be punished if you miss just one payment, but if you miss two payments in a row or a couple over time, you can expect your credit card provider to penalize you. Your credit score could also take a huge hit.

Note that penalty interest isn’t an additional interest you need to pay, but rather your normal interest rate raised to a higher level. If you do incur the penalty interest rate you will have to be diligent with making timely payments for a few months before it’s lowered again. 

Choosing a low interest credit card

If credit card interest is a concern, then consider applying for a credit card with a low interest rate. There are a number of options for low interest credit cards available to Canadians and they can be a great option for individuals who need to make a large purchase but don’t have the cash on hand. The low interest will make it easier for you to pay off that debt faster.

To help you choose, I’ve put together this list of the best low interest credit cards in Canada.

Keep in mind, low interest credit cards don’t have the same perks and rewards systems as your day-to-day credit cards. So, if you are confident that you can pay off your credit card statements each month then you should consider a travel rewards credit card or a cash back credit card to get the extra benefits.

If a low interest card makes sense for you, here’s one that I recommend.

BMO Preferred Rate Mastercard®*

Apply Now

• $29 annual fee – first year free
• .99% introductory interest rate on Balance Transfers for 9 months with a 2% transfer fee
• 13.99% interest rate for purchases
• 15.99% interest rate for cash advances

The BMO Preferred Rate Mastercard®* has an annual fee of $20 is waived for the first year. The balance transfer option gives you a 3.99% introductory interest rate on balance transfers for 9 months which is a great way to reduce your debt, but note there is a 1% transfer fee. Once the promotional period is up, you’ll pay 12.99% interest which is still a great rate.

Final thoughts

Credit card interest can be a bit confusing given that there are so many types of interest involved. It’s important to be aware of different rates and charges that can apply with credit cards but the main takeaway is your best bet is to use your credit card responsibly and pay it off in full every month.

As the airline and hotel industries try to recover, we’re starting to see some serious deals. I saw a flight to Japan from Toronto for $600 return which I almost booked immediately. I’ve also come across some incredible nightly rates at some popular hotels.

While taking advantage of these sales can be beneficial, it’s not worth it if you can’t afford it. Here’s how to plan a vacation without going into debt.

Start researching costs now

It doesn’t matter where you’re thinking about going, you need to research all your costs in advance. I’m talking about flights, hotels, local transportation, food & drink, attractions, and random spending. That may seem like an extreme thing to do while you’re in the planning stage, but if you don’t know how much things are going to cost you, how are you going to budget accordingly?

I typically research a few different destinations I’m interested in, and sometimes I’ll quickly realize one destination is cheaper than the other. For example, Bali and Jordan are less expensive destinations compared to Iceland even though you can find flights to Iceland from Toronto on sale for $400. When you factor in all the expenses associated with your trip, you’ll have a clear picture of how much your vacation is going to cost you.

Have a set budget in mind

It’s a good idea to set a yearly vacation budget so you know exactly how much you’re spending. Let’s say your budget is $3,000 a year for trips, that means you need to set aside $250 a month. For some people, finding an extra $250 every month is not an easy thing to do.

With that budget set, you can take as many trips as you want as long as you don’t spend more than what you’ve allocated. That could be one big trip to Europe or a couple of shorter weekend trips.

If you’ve done your research and a destination you want to go to costs more than your budget allows, you need to save more or choose a different destination. Sticking to your budget will ensure that you can take a vacation without going into debt.

Don’t buy flights on impulse

I love a good flight deal. Honestly, nothing excites me more than seeing a ridiculously low price advertised, but I’ll never instantly book a flight even if it’s 50% cheaper than the average price. As explained above, you really need to factor in the additional costs associated with your trip.

What good is a $400 flight to Hawaii if it’s going to cost you another $3,500 once you’re on the ground? It’s easy to convince yourself that you couldn’t pass up on a deal, but if you’re going to end up charging everything else to your credit card with no plan to pay off the entire balance when you get back, how is that a deal? Credit cards charge an average interest rate of 19.99%, you could up end up paying more in interest than what you saved on that deal.

If you find yourself booking every cheap flight you see, it’s time to stop following those airfare websites. Don’t forget to unsubscribe from their mailing lists and to unfollow their social media accounts.

Start saving

If travel is essential to you, then you need to set up a dedicated vacation fund. Every month, set aside a set amount that’s automatically transferred to your travel fund. $25 a month won’t go very far, but the idea is to get things started early. If you can bump your savings up to $100 a month, you’ll have $1,200 at the end of the year which is a decent amount of money for a trip.

If you really want to motivate yourself, you could work backwards based on your estimated trip costs. Let’s say you plan on taking a trip to Thailand in a year and you’re expecting the trip will cost you $2,400. That means you need to save $200 a month to stay on budget.

Ideally, you want to park that money you’re setting aside in an account that’s going to earn you some interest. Alterna Bank has a Tax-Free eSavings Account and High Interest eSavings Account that both pay a respectable interest rate. Both accounts have no fees and no minimum balance requirement which makes it the perfect place to park your money until your trip expenses come up. Alterna Bank has consistently offered high interest rates with no gimmicks and no teaser rates to lure customers in.

Alternatively, there’s EQ Bank that offers a great interest rate on their account, but it’s not available in your TFSA.

Be smart about where to minimize your costs

I’m all for saving money on vacations, but I don’t believe in cutting costs if you’re going to sacrifice experiences. During my younger days, I would eat as cheaply as possible and try only to do free attractions. As a result, I didn’t try tapas the first time I was in Barcelona nor did I see the Book of Kells in Dublin. Even though I saved money and still had fun, I regret both of those decisions.

I’m not suggesting you should splurge on everything, but I think you need to be smart about where to minimize your costs. For example, if you’re a foodie, don’t cheap out on dining. Instead, try to cut back on your accommodations or don’t have alcohol with every meal. Alternatively, if you like museums, pick one or two that you’re willing to pay for and skip the rest. Better yet, see if the museums have any free days or if the city offers some kind of museum pass which will help you save money on the admission cost.

Use credit cards to your advantage

I realize that I said using your credit cards could ruin your vacation budget, but when used responsibly, credit cards can be an incredible way to save you money. Take a look at my list of the best travel credit cards in Canada. Just about all of them offer at least $250 in signup bonuses and then there are additional benefits such as travel insurance, companion tickets, and lounge access that can also save you money.

With travel credit cards, you earn points on all of your everyday purchases. Once you accumulate enough points, you can use them towards your travel which will offset your costs. You can also use cards that give you free lounge access or no foreign transaction fees to help you save. This strategy only works if you’re responsible with your spending and you always pay your bills in full and on time every month. It doesn’t matter how many points you’re earning, paying interest is never worth it.

If you’re the type of person that prefers one of the best cash back credit cards in Canada, just save all the cash back you’ve earned and put it towards your travels.

Don’t take trips even if you can afford it

A recent study by the Canadian Payroll Association, 47% of Canadians were living paycheque to paycheque. If this sounds like you, then obviously you shouldn’t take a vacation, but some people don’t even realize the situation they’re in.

Listen, if you have no savings but you justify your spending because you don’t have any debt, you’re doing things wrong. You’re literally living paycheque to paycheque. Taking that vacation may not put you in debt, but you’re one purchase or emergency from being in debt.

Instead of spending your cash, consider building an emergency fund. By doing so, you’ll be prepared for any future financial hardship.

Final thoughts

Planning a vacation without going into debt should be easy, but one small misstep and you could be spending more than you anticipated. Follow the above tips and budget a little more so you have a buffer and you won’t need to worry about your finances while you’re away.

The truth is, Canadians have record debt levels and as many people have quickly learned, a loss in income can quickly impact their ability to service their debt. That has left many people wondering how to get out of debt fast?

Unfortunately, there’s no quick way to get out of debt. It’ll likely take you years to get back on track and there will probably be some bumps on the way. That said, here are 15 ways for how to get out of debt.

Update your budget by slashing expenses

If you want to know how to get out of debt, the first thing you need to do is update your budget. First, cut any unnecessary expenses. I’m talking about almost anything that isn’t required for you to survive. Now take a look at the remaining expenses such as your cell phone plan or grocery bill, are there any ways you can reduce those expenses? Now put all that money saved towards your debt.

Keeping your expenses low is important, but you don’t need to cut everything out. Having one streaming service is okay since you’ll still need entertainment, but you definitely don’t need three. These cuts will hurt, but they’re meant to be temporary. Once you have a handle on your debt, you can start increasing your spending again.

Always pay your full balance on time

In an ideal world, you’ll always be paying the full balance on your credit card every month. By doing this, you’ll avoid any interest payments. If you didn’t know, the average interest rate is around 20% for credit cards, which is a steep price to pay. If you’re always paying your full balance, you can take advantage of travel or cash back rewards that come with your credit card.

Pay more than the minimum balance

Okay, if you’re in debt, the odds are you’re not able to pay the full balance every month, but you should at least strive to pay more than the minimum balance. Take a look at your credit card statement, if you look to the side, it’ll show you how many years it’ll take you to pay off your debt if you’re just making the minimum payment. Trust me, you’ll be in shock.

You may also want to read about how credit card interest works. Once you realize how much this debt is costing you, you’ll likely want to pay off your balance ASAP.

Use the debt snowball method

With the debt snowball method, you start by paying off your smallest debt (by dollar amount) first before moving onto the larger ones. The idea here is to get instant satisfaction whenever you eliminate one of your debts which will, in theory, encourage you to pay off the rest of your debt. 

Keep in mind that you still need to make the minimum payment on your other debts to avoid any missed payments, but any extra money available should be put towards your smallest debt first. Once that debt is paid off, move on to your next one. Repeat this process until you’re debt-free.

Try the debt avalanche method

The debt-avalanche method is similar to the debt snowball method, but in this case, you start with your highest interest debt first. In most cases, this would be your credit card debt or car loan.

Since credit cards have high interest rates, it makes the most sense to pay those down first compared to a lower interest debt. The obvious advantage of the debt avalanche method is that you’ll pay less interest in the long run. 

Work more or get a side hustle

If your job allows you to pick up more hours or to work overtime, do it. That extra income will go a long way. Some people assume that working more isn’t worth it since you’ll be taxed more, but that couldn’t be further from the truth. All you need to know is that more work means more money in your pocket.

Another thing you could consider is picking up a side hustle. If you have any hard skills, consider making your services available on Upwork or Taskrabbit. You could even get a second job doing deliveries or working retail. If you want to get out of debt fast, earning more income will help you do it.

Use a low interest, balance transfer credit card

If you want to know how to pay off credit card debt, then look at one of the best low interest credit cards that have a balance transfer option. Balance transfers are great because it allows you to transfer the balance from one credit card to another. This is beneficial because the new credit card will usually have a promotional period where you’ll pay less interest.

How much lower are we talking about? It depends on the card, but you could pay 0-3.99% interest for 6-9 months. You can do some serious damage to your debt during that time. Even if you don’t manage to pay off the entire balance during the promotional period, you’ll likely still get a lower interest rate compared to most credit cards, so it’s a win-win situation for you. 

Switch to a prepaid credit card

Studies have shown that people who use credit cards spend more than people who use cash. It makes sense since using credit allows you to pay later, whereas you physically see your money leaving your wallet whenever you make a purchase with cash. It can be difficult to go cash-only, so a good solution is to use a prepaid credit card.

A prepaid Visa card such as KOHO only allows you to spend what you’ve preloaded onto your card. This is a good way to keep your spending in check while giving you access to credit networks which are essential if you’re doing any online shopping. In additional, some prepaid credit cards allow you to earn rewards on your spending.

Get a budgeting app

No one said you have to get out of debt on your own. To help you with the process, you could use a budgeting app. Every app does things a little different, but I like Mylo and Hardbacon since they automate your savings which will help you reach your goals quicker. You could also take a look at Mint as it allows you to link to all your financial institutions giving you a detailed look at your finances.

Apply for a consolidation loan

This is a single type of loan which traditionally comes from a bank. The way it works is you would get a new loan with a lower interest rate. You would then take that money and pay off any outstanding debt. Now you only have one debt which should make paying off your debt easier. That said, you’re getting access to more money, so if you’re not responsible, you could end up owing even more.

Avoid the small purchases

If you’re still trying to figure out how to get out of debt, start looking at your daily spending. If you can avoid small purchases such as coffee, snacks and take out food, you can redirect your money towards your debt. 

You’ll likely end up spending more on groceries as a result of cutting back on the smaller things, but you can keep things under control by coming up with a meal plan. By doing this, you’ll only be shopping for groceries that you need and you’ll avoid food waste.

Watch the big purchases

Alternatively, if you avoid the big-ticket items, you can keep your debt under control. It doesn’t matter how many daily coffees you skip, if you go out and finance your laptop or vacation on credit, you’ll never get ahead.

I’m not suggesting that you skip out on spending completely, you just need to decide how badly you need things. Remember, any money you don’t spend can go towards helping you become debt-free.

Spend less than what you’re approved for

When getting a loan for a car or home purchase, many people end up using the entire amount that they’re pre-approved for. Yes, this will give you more buying power, but it also means you’ll end up paying more in the long run. The sales rep may try to get you to look at costs on a monthly basis so things seem more affordable, but since you’re the one paying the bills, you need to think long term and how this debt is going to affect your lifestyle.

Shop around for your insurance

It doesn’t matter if you’re looking for term life insurance or auto insurance, you need to shop around before you commit. Generally speaking, when added up, insurance can be one of your major monthly expenses. It doesn’t have to cost you a lot, but at the same time, you want to pay as little as possible while getting the coverage that you need.

Speak to a licensed insolvency trustee

For those who have crippling debt and can’t seem to find a way to get out of it, you need to speak to a licensed insolvency trustee. They can give you an unbiased opinion based on your current financial standing. One of the solutions they may present to you is a consumer proposal. This could interest some people in debt because it allows them to keep some of their assets, but debtors need to agree to the plan. Another option is bankruptcy, but that’s a worst-case scenario when you’re trying to get out of debt.

Final thoughts

No one said getting out of debt would be fast or easy. It’ll take a lot of work and potentially a lot of time. However, if you follow some of the tips above, you’ll find yourself back in the black in no time.

To help you navigate the decision to seek professional help, I reached out to Linda Stern, a licensed insolvency trustee at Crowe Soberman Inc. who wrote today’s guest post.

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You’re worried about not being able to pay your debts that have mounted due to either overspending, poor budgeting, a matrimonial separation, illness or perhaps overseas family assistance. Your situation may be exacerbated as a result of a recent loss of employment due to COVID19. It may be clear to you that you will not be able to pay your debts in a reasonable period of time even when you will return to work.

At this point, you may be looking at all your options. You are anxious, stressed and worried. Perhaps you feel that the current uncertainty due to COVID19 will buy you some time to decide how to deal with your debts. There are relief programs in place now to help individuals through the government and lenders. However, in my experience, where debts are looming, this current relief is temporary and is equivalent to “using a band aid on a wound that needs stitches.” Interest will continue to accrue on outstanding debts over the ensuing months.

Here’s what you should consider when reaching out to a licensed insolvency trustee.

Actions of creditors

Are you receiving calls from your creditors and collection agencies? Have your wages been garnished by either Canada Revenue Agency (CRA) for outstanding income taxes or HST (self-employed individuals) or by your creditors? Has the CRA registered a lien on your property? Are you losing sleep worrying about how to pay your debts?  Are your worries affecting your relationships with your family and friends?

If you answered to one or more of these questions and you want a fresh start, here are some steps to help you get started.

Prepare a monthly budget 

After receiving your income and paying all necessary expenses, how much remains in your bank account? Hopefully you have a surplus, but some people are often just breaking even and sometimes in the negative. If you’re thinking about bankruptcy, you may want to update your budget first to see if you can pay off your debt first. Need help with your budget? The Government of Canada has a great budget planner to help you out.

Making the Decision

If your budget isn’t helping you get out of debt and you think you need professional help, contact a licensed insolvency trustee (LIT) for a free consultation. They’re unbiased and will go over your situation. Through a series of questions such as who do you owe money to? What is your current monthly income and expenses? What assets do you own? What are you up-to-date on your income tax filings? And, what were the reasons that caused your financial difficulties, they can present options to you.

The options available to you

The Bankruptcy & Insolvency Act (the “Act”) is a federal statute that provides relief to individuals or companies who are insolvent (unable to pay their debts). 

The options available under the act for individuals are bankruptcies and proposals which are filed with a LIT since they’re a court officer.

Both options provide the following:

• Protection from legal actions and garnishments by creditors known as a legal stay of proceedings
• Forgiveness of unsecured debts upon either the Debtor’s discharge from bankruptcy or completion of a consumer proposal.

Personal Bankruptcy

Personal bankruptcy is a legal process for an individual who is unable to pay their unsecured debts in full, including outstanding income taxes and business HST but excluding mortgages; leased and financed vehicles. The personal bankruptcy is filed with a LIT, also known as a bankruptcy trustee. Depending on a person’s income and assets, the period that a first-time debtor is bankrupt is either nine or twenty-one months. After that period, most debtors are entitled to an automatic discharge from bankruptcy. 

The act provides for a debtor to assign their non-exempt assets to the LIT. Some examples of non-exempt assets would be real property, Tax Free Savings Accounts (TFSA’s), Registered Retirement Savings Plans (RRSPs) with contributions made in the twelve-month period prior to the bankruptcy, Registered Education Savings Plans, and income tax refunds for the year of bankruptcy and any prior years.

Consumer Proposal

A consumer proposal is an alternative option available to Debtors and it is filed with LIT who acts as the administrator to the consumer proposal. The act provides for debtors to file a consumer proposal to its unsecured creditors who are owed less than $250,000. The term of the consumer proposal is five years comprising of either sixty monthly payments or lump sum payments depending on the debtor’s situation. 

The difference between a consumer proposal and bankruptcy is that the debtor keeps all their non-exempt assets.

For example, Mary is employed as an administrative assistant in an insurance company. Her net monthly income is $4,000. In addition, Mary receives child tax benefits. She is a single mother of two primary school-aged children. Since the birth of her children, Mary has saved for her children’s education and has contributed to RESPs in the amount of $3,500, net of the available government grants. Mary also has a TFSA valued at $2,500. 

Mary has accumulated credit card debt of $30,000 and has an outstanding line of credit of $10,000 for a total debt of $40,000. The reason that Mary has these debts is that she has not received any child support from the children’s father. Between the cost of living, daycare and extra-curricular activities for the children, Mary used her credit cards and lines of credit to supplement her income. 

Mary has decided to reach out to a LIT as she can no longer manage her debts. Should she file a bankruptcy, her RESP’s and TFSA would be assigned to the trustee. In other words, she would lose her investments totalling $6,000.

If Mary chose to file a consumer proposal instead, she will retain her investments and offer a five-year monthly proposal to her creditors such that the return (also knows as the dividends paid to creditors) will be greater than in a bankruptcy. The amount that May can offer may be between $200 to $250 a month, provided her budget can allow for this. These payments are commonly referred to as the proposal fund. Mary’s creditors have 45 days to vote in favour or against the proposal. Once the proposal is accepted, Mary retains her investments.

In summary

If you’re drowning in debt, you still have a few options available to you. The best solution would be to speak with a licensed insolvency trustee who can present you with different scenarios and explain why they may benefit you. Debt and thought of bankruptcy are stressful, but there’s no reason why you have to handle things on your own.

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Linda Stern is a Senior Manager and Licensed Insolvency Trustee at Crowe Soberman Inc. She has over twenty-five years of experience working in Montreal, Ottawa and Toronto, primarily in consumer insolvency matters consulting with individuals overwhelmed with debt and helping them find solutions that work best for their financial and personal situations. She can be reached at linda.stern@crowesoberman.com

Having a huge bank of travel points or miles is great if you plan on travelling, but what happens if you’re grounded? You may not be able to travel for a variety of reasons, but the most common reason is cost. If you’re facing cash flow problems, travelling is going to be a low priority for you.

Now, what if your finances are really taking a hit right now? As in, you’re really in jeopardy of going into debt soon or missing payments? In this case, using your points to pay for your bills or expenses is an excellent idea, but is it easy to do? Here’s how to redeem points for gift cards with the various loyalty programs in Canada.

Aeroplan

Aeroplan is one of the largest airline loyalty programs in the world and they have many partners where you can redeem Aeroplan miles for gift cards including:

• Esso
• Amazon
• Costco
• Petro Canada
• Winners Indigo
• Hudson’s Bay
• Starbucks
• The Keg

Every merchant has a different number of miles required to make a redemption but they mainly breakdown to the following:

• 14,000 Miles = $100
• 7,000 Miles = $50
• 3,500 Miles = $25

Interestingly enough, Costco gift cards are of good value since it only takes 13,500 Miles to claim $100. If you prefer flexibility, you can claim 11,500 Miles for a $75 gift card which is a slightly lower value than if you had redeemed a gift card at a specific merchant.

AIR MILES

If you want to redeem AIR MILES for gift cards, you need to be collecting AIR MILES Cash Miles. You can not convert any existing Dream Miles into Cash Miles. Assuming you’ve been earning Cash Miles, you can claim 95 Cash Miles for $10 at multiple merchants including: 

• Metro
• Shell
• Rexall
• Sobeys
• Jean Coutu
• Foodland
• Pizza Pizza

With some of these merchants, you can redeem your Cash Miles instantly in-store when making a purchase. With the others, you would get an eVoucher which you could show in-store or online to get your discount.

American Express Membership Rewards

American Express Membership Rewards is quite flexible since you can use your points for gift cards or as a statement credit. If you want to use your points for a gift card, the partners you have available include:

• Oliver & Bonacini
• Indigo
• Saks Fifth Avenue
• Home Depot
• Hudson’s Bay
• Holt Renfrew

All of the gift cards require the following number of points to make a redemption:

• 3,250 points = $25
• 6,500 points = $50
• 13,000 points = $100

Another great feature of American Express Membership Rewards is that you can use your points as a statement credit. Depending on if you have a personal or business American Express Card, your points have different values.

• All consumer cards: Non-travel is 1,000 points = $7, Travel is 1,000 points = $10
• All small business cards can redeem for all charges (both travel and non-travel) at a rate of 1,000 points = $10

With the consumer cards, your points are worth 30% less when redeeming a statement credit compared to if you had used it for travel. However, there’s a trick you can use to get a bit more “cash” value out of your points. You can claim 3,125 points for a $25 prepaid American Express Card which gives you a value of .08 cents per point which is .01 higher than the statement credit option. Note that although the American Express Cobalt and the American Express Business Edge cards earn you MR-S points, the statement credit options fall under consumer and small business respectively.

RBC Rewards

If you collect RBC Rewards, you can redeem your points for gift cards or a statement credit. When using your points for gift cards, most of the redemptions will cost you 14,000 points for a $100 gift card. RBC Rewards has more than 100 partners, but some of the more popular ones include:

• Amazon
• A&W
• The Beer Store
• Canadian Tire
• Cadillac Fairview
• Dollarama
• Food Basics
• Longo’s
• McDonald’s

For those who prefer a statement credit, it’ll cost you 17,200 points for a $100 credit which is a lower value than getting a gift card. If your mortgage is with RBC, you can claim 12,000 points to get $100 off your principal which is an incredible value when you consider how much you’ll save on interest charges over the remainder of your mortgage.

Scotia Rewards

For Scotia Rewards collectors, most gift cards will cost you 13,400 points for a $100 gift card. Some of the available merchants where you can redeem points for gift cards include:

• Tim Horton’s
• Sephora
• President’s Choice
• Amazon
• Shell
• Metro
• Walmart

When it comes to statement credits, Scotia Rewards has a sliding scale. The more points you claim, the larger statement credit you’ll get, but it’ll also cost you fewer points compared to the lowest redemption value. Here are some of the point redemptions it’ll take for you to claim a statement credit.

• 3,000 Scotia Rewards points = $20
• 4,500 Scotia Rewards points = $30
• 7,500 Scotia Rewards points = $50
• 11,000 Scotia Rewards points = $75
• 14,500 Scotia Rewards points = $100
• 21,500 Scotia Rewards points = $150
• 43,000 Scotia Rewards points = $300
• 71,500 Scotia Rewards points = $500

TD Rewards

With TD Rewards, it’ll cost you 400 points for $1 in gift cards or statement credits. This is half the value compared to if you used your points for travel, but if you’re desperate, you might as well use them as a statement credit since the redemption is the same. That said, if you do want a gift card, some of the merchants available include:

• Cadillac Fairview
• Canadian Tire
• Costco
• Esso
• Longo’s
• Pizza Pizza
• Metro

BMO Rewards

BMO Rewards allows you to claim 15,000 points for a $50 statement credit which is handy, but if you want a gift card, things are more complicated than they need to be. Every merchant has a different redemption value, but it’ll cost you between 17,500 and 20,300 points to get a $100 gift card at merchants including:

• Cora
• Starbucks
• Costco
• The Keg
• Amazon
• Winners
• Simons

CIBC Rewards

Finally, of all the bank travel rewards programs, there’s CIBC Rewards which also allows you to redeem points for gift cards or a statement credit. The redemption ratio for gift cards is 3,500 points for $25 and they have many popular merchants including:

• Costco
• President’s Choice
• Tim Hortons
• Walmart
• Amazon
• Moxie’s Grill & Bar

You do have the option to redeem 4,000 points for $25 a statement credit, but that’s a lower value than gift cards. If you have a mortgage with CIBC, using 12,000 points will reduce your mortgage by $100 which could be a good value in the long run when you consider the interest paid over your amortization period.

Marriott Bonvoy

Marriott Bonvoy is the best hotel loyalty program in Canada, but if you want to redeem your points for gift cards, it appears that you can only get them with US merchants including:

• Amazon.com
• Best Buy
• Gap
• Uber
• Applebee’s
• Boston Market
• Darden Restaurants

It’ll cost you 30,000 Marriott Bonvoy points for a $100 USD gift card. I suppose these can be useful if you’re going to visit the U.S. soon, but if you’re hurting for cash and using your points for gift cards, travel is likely not high on your priority list.

Final thoughts

When you redeem points for gift cards or a statement credit, you won’t get the maximum value for them, but if you’re facing a cash crunch, it’s a good solution. There’s no point in holding onto your points or miles if you’ve lost your job and your emergency fund is quickly being drained. Cash out your points now so you can buy some time.

If you’re starting to worry about your debt, try to think about the positives. You know that you may be running into a problem, and now you’re taking the steps to get back on track. Depending on how much debt you have, it may take some time to clear your debt, but these tips will help you if you’re wondering what to do if you have too much debt.

Stop spending

I’m not suggesting that you stop spending all your money, but if debt is a concern, you need to start thinking about what you spend your money. First off, stop using your credit cards! Take them out of your wallet, cut them up, or freeze them. I don’t care, just stop using them. The last thing you want to do is to add on any additional debt while you’re trying to get out of debt.

You’ll then need to prioritize your spending. Buying things and eating out is fun, but your debt should always be your number one priority. Seriously, think about your spending habits because any money you save can be redirected towards debt repayment.

Balance transfer your credit cards

I wrote about balance transfers in a previous post which will give you more details, but the idea is to transfer your current credit card debt to a different credit card with a lower interest rate. Many cards offer a 0% balance transfer for a set period of time before defaulting back to the normal rate. This may seem like a trivial amount, but if done effectively, you can save a fair amount on interest charges.

Get some help!

What many people don’t realize is that there are great people out there who want to help you. Bankruptcy trustees and credit counsellors specialize in debt management and will be able to go over your complete financial situation. They’ll discuss options with you and come up with a debt solution that will get you back on track – they can even negotiate a lower interest rate for you. Some people assume that working with a bankruptcy trustee or credit counsellor means you have to declare bankruptcy, but that’s not true. There are many solutions that they can discuss with you, but in some cases, bankruptcy might be the right choice.

One thing to note, you should only work with a licensed trustee or counsellor. If you come across an ad with someone offering to fix your credit score or clear your debt for a fixed price, it’s probably a scam.

Negotiate a better rate

In some cases, it’s possible to negotiate a lower interest rate from your credit card provider, but this usually only applies to people who have a history of making their payments on time. That being said it’s up to the credit card provider to offer a lower rate, so it never hurts to make a quick phone call to ask. Not all providers are open to lowering rates which is why I think balance transfers or working with a bankruptcy trustee is a better idea.

Make more money

This is a controversial tip since not everyone will agree, but making more money is an obvious way to reduce your debt. I understand that it’s not easy to just “make more money” but have you really thought about ways to bring in additional income? Maybe you can pick up more hours at work or pick up a side income. These opportunities won’t come knocking on your door. You need to hustle if you want to make more money. If you want to do something about your debt, then finding ways to make more money needs to be considered. Of course, the alternative is to cut your expenses which is a lot easier than making more money.

With the cost of a loan being so much, why do people even bother with them at all? Well, there might be an unexpected expense or a loss of income where you need a quick fix. But it appears that many people don’t realize how much it’s costing them.

Payday loans have become such an issue that the Financial Consumer Agency of Canada (FCAC) released a report highlighting the need to increase consumer awareness about the high cost of these loans.

How payday loans work

On average a $100 loan will cost you $21 in fees, so a $300 loan will cost you $63. At face value, that’s a 21% interest rate which appears to be lower than some credit cards. However, credit cards (and lines of credit) charge based on an annual percentage rate (APR). Payday loans will require you to pay back your loan in the next 14 days (your next payday, hence the name), which is much more expensive.

The real cost of borrowing that money for 14 days ends up being 547.50%!

How did that number get so high? Here’s how payday loans are calculated. Take the cost to borrow ($63) and divide that by the amount borrowed ($300). This will give you the interest rate for the duration of the loan which works out to 21% for 14-days.

To get the annual rate, you need to first figure out how many two week periods fit into a year. For the exact amount, divide 365 (days) by 14 (days); that gives you 26.0714.

Finally, take the two week period (26.0714) and multiple it by the interest rate of two weeks (21%). That’s an annual interest rate of 547.50%!!!

Still confused? My friend Preet Banerjee explains why payday loans are the worst in this video

Facts about the payday loan report

The goal of the report was to figure out why people use payday loans. The findings were quite alarming

• 43% were aware that payday loans are more expensive than credit card cash advances
• 89% said they used a payday loan to cover unexpected expenses, necessary and expected expenses, and to avoid late charges on bills
• 20% had a reported household income exceeding $80,000, while 7% had more than $120,000
• 65% said they did not have a credit card when they last used a payday loan, while 88%  said they did not have a line of credit

Without analyzing the data too much, it seems like quite a few people just don’t understand how much these payday loans cost. It’s really not surprising, payday lenders have flash advertising which makes the loans seem free. Unfortunately, you have picked up much more debt before you realize what you really owe.

Having access to credit can be a real issue too. Without knowing the details, I imagine some people who use payday loans are desperate. The good thing is, there are options.

How to avoid payday loans

The most logical thing would be to build an emergency fund. As the name applies, this fund is meant to help you through any emergencies. I personally set aside three months’ worth of expenses which I can easily access. For some people, three months of expenses is a lot of money so start by putting aside $25 – $50 a month.

Another good option and what some people use as their emergency fund is a line of credit. A line of credit is available from your bank, but you’ll need a good credit score. They’re attractive since they have reasonable interest rates and are pretty easy access. Of course, if you’ve got a questionable credit history, it’s unlikely your bank will approve you.

Finally, there is credit card cash advances. They’re incredibly expensive since they average 20%+, but that’s a lot cheaper than the 500%+ from payday loans. The only time you should use a credit card cash advance is when you’re only other option is a payday loan.

Final thoughts

There are many lenders out there with flashy advertising and promotions that lure you in, but you could end up paying a fortune. Whenever you borrow money, be sure to read the fine print. If you haven’t figured it out yet, payday loans are the worst. Don’t get one!

If you want to get out of debt fast, you’re going to need to take control of your own situation. Begin by writing down everyone you owe money to, how much you owe, and what your interest rate is for each of those debts. With all this info handy, you can then decide what method works better for you; debt-snowball or debt-avalanche.

The debt-snowball method

American finance author Dave Ramsey came up with the debt-snowball method and it has gained much popularity over the years. Basically, you start by paying off your smallest debts (by dollar amount) first before moving onto the larger ones. The idea here is to get instant satisfaction whenever you eliminate one of your debts which will, in theory, encourage you to pay off the rest of your debts.

Keep in mind that you still need to make the minimum required payment on all of your debts, but any extra money available should be put towards your smallest debt. Once that first debt is paid off, move on to your next one. Repeat this process until you’re debt-free.

The sense of accomplishment you get after paying off each debt may be worth it psychologically, but by using this method, you end up paying more in interest charges in the long run. From a straight numbers perspective, using the debt-avalanche method makes more sense.

Related: Debt repayment options

The debt-avalanche method

The debt-avalanche method works in the same method as the debt-snowball method, but in this case, you start with your highest interest debts first. In most cases, this would be your credit card debt, car loans, and student debt.

Credit cards tend to have pretty high-interest rates, think 19.99%+ so clearly it makes the most sense to pay that down first compared to a debt that may only have a 5% interest rate. The obvious advantage of the debt-avalanche method is that you’ll save a ton of money in the long run since you’re focusing on high-interest debts first.

The only “problem” with this method is if you end up having a large balance on your credit cards. At times. it can definitely seem like you’re not even making a dent on your debt loads. It may seem like it’s taking longer to pay off your other debts, but you’ll actually get out of debt faster since there will be less interest paid.

Final thoughts

Which debt repayment method you choose is ultimately up to you, but as long as you stick to one method, you’ll be in good shape. The snowball-method will give you small victories while the avalanche-method will save you money in the long run. Either way, you’ll be focusing on reducing your debt and that’s what matters most.