14 Jun 2013

The Perils of Credit Cards

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Credit cards are very useful but they can also hurt you.

Do you know all the terms of all your credit cards? Do you really use or even want any of the benefits, such as rewards, travel or cash back for which you are eligible? Have you ever balanced the value of the benefits against the costs of using the card?

Probably not.

Credit card issuers have done their research and designed a range of cards for more finely identified market segments. The appeal to the consumer is in the various types of incentives: travel, rewards or cash back. The incentives vary but the common theme is a consumer benefit of some kind.

Benefits can run from simple offerings such as:

  • Earn 2% cash back credits on grocery store purchases;
  • Earn up to 1% cash back credits on all other purchases;
  • Redeem your cash back credits on flexible terms; to the more complex:
    • Earn a welcome bonus of 150 AIR MILES®* reward miles on the first-time use of the card;
  • Earn one reward mile for every $15 in card purchases at AIR MILES®* Sponsors;
  • Earn one reward mile for every $20 in purchases charged anywhere else;
  • Shop at participating AIR MILES®* Sponsors across Canada with your BBBB® AIR MILES®* Credit Card and your AIR MILES®* Collector Card, and you can earn reward miles twice;
  • Redeem for a wide range of rewards — everything from movie tickets to electronics, travel and more. More Incentives Mean Higher Potential Cost.

    But how do the issuers give stuff away yet still make a profit? As a rule, if a credit card issuer offers more rewards, there is usually an annual fee and a higher interest rate on outstanding balances. Canadian business credit cards that offer annual rates as low as 3.25% – 4.50% offer little in the way of incentives. On the other hand, there are American-based credit card companies charging the equivalent of 30% annually on balances.

    Convenience

    Credit card use has many advantages for both merchants and consumers. They protect merchants against NSF cheques since the card issuer deals with the consumer and the issuer’s quick payment to the merchant provides the merchant with virtually instant cash flow. Cards also provide a convenient loan for the user when cash is low and purchases are necessary. Combine these positives with the fact that credit card purchases effectively offer 20-30 days of interest-free bridge financing to the consumer (if the loan is repaid on time) and the usefulness of credit cards becomes obvious.

    Review your business credit cards and add up all the debt.

    Credit Cards Can Be a Burden

    Why then have credit cards become such a burden not only to the economy of Canada, but also to the average Canadian? The answer is simple: the convenience of credit cards, combined with the rewards and the low minimum monthly payments, is difficult for the consumer to resist. However, as many consumers are discovering, it’s easier to run up balances than pay them down.

    So, how does the average small business owner control credit card debt?

    The first step is to review the number of credit cards your business uses and add up the debt on each card. Most businesses will be surprised to discover that, although individual card debt is not great, the aggregate is significant.

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