Finance is a serious topic of discussion right now, one which will become even more topical as the holiday season approaches. The country often views the upcoming time of year as one that boosts the economy as consumer shopping increases, often on credit. But with Canadians only just emerging from the hurdles of the recent recession, are we ready to add more debt to our lives? Or will we instead be counting our pennies, replacing credit with cash? Perhaps this will be another year of cutting costs as we purchase gifts, throw parties and search for that perfect holiday outfit.

The next two months will tell if we’re truly ready to loosen the grip on our purse strings. According to the Global Hunter Securities Holiday Sales Preview for 2009, we’re expected to see a 1% increase to a 1% decrease of sales between now and a year ago. This is promising considering 2008 saw a 7.6% decrease in sales from 2007.

As reported by RetailSails.com, a website dedicated to tracking retail trends across the country, retailers saw a depressing season in December 2008 in terms of the amount of people spending money. According to RetailSails.com, the average merchandise sales in 2008 from June to September were $374 billion, while December 2008 sales were $136.3 billion. And retail sales have remained quite low since January 2009, continuing to fall each month.

The economy is recovering and consumer confidence has increased over the course of a year, but some of us may still be a little shell shocked when it comes to handing over our credit cards to retailers. Regardless of whether or not we use it to make payments this holiday season, with 68.2 million Visa and MasterCard cards in circulation throughout the country, the credit card is still very much alive in Canadian households.

According to Stats Canada, 84% of Canadians have credit cards. Of those, a staggering 85% have reported that they have outstanding debt on those credit cards. But the good news is that 70% of us pay off our cards in full each month. Even still, a surprising 24% of us use them daily. The next two months will tell if these numbers will increase or decrease.

Even if you’re thinking about replacing your credit card with cash this holiday season, you may not want to give up on that piece of plastic sitting in your wallet quite yet. There are benefits to using credit, so long as you use it responsibly.

What are the benefits of a credit card?

The credit card, a convenient financial management tool accepted in 170 countries and at 30 million locations worldwide, provides consumers with an easy and safe payment solution without having to carry around large amounts of cash. With a credit card, consumers have access to credit that doesn’t require collateral against amounts charged. Charges remain interest free from the time of purchase to the end of the billing period. Therefore, a consumer has one month to make a payment without seeing a penalty. Credit cards also protect you against fraud with zero liability. So if someone steals your card and charges it, in most cases you’re not held responsible. But if someone steals your cash, you’re out of luck. Some of the most popular credit cards let you benefit from reward programs such as air travel, grocery purchases, car insurance and much more depending on the type of credit card you sign up for.

In addition to the obvious benefits of owning a credit card, you also have the chance to build up a positive credit rating. Using one responsibly will prove you are dependable when applying for jobs, insurance coverage and car and home financing. It’s very important to prove to lenders that you are aren’t a risk to them financially.

But what are the costs of a credit card?

While owning a credit card has its benefits, it’s important to be aware of the costs as well. Every credit card has its own interest rate and penalty rate. And every purchase you make will fluctuate in cost depending on that interest rate and on your repayment habits. The amount on your receipt may just be more than what you’ve bargained for.

For example, let’s say you purchase $200 in gifts this holiday season with your credit card but can only afford $50 a month to pay it off. If you’re using a Visa or MasterCard, the average interest rate you’ll be paying is 18%. On top of that, you must pay an effective annual rate (EAR) of 18%. In the end, if you make your payments on time and the interest rates remain the same, you end up taking over four months to pay off your debt and will in fact have paid $207.79 rather than the original $200.

Now using a store card can be worse if you’re not careful. Let’s say you purchase $200 in gifts using your retail store card. Store cards often carry higher interest rates, averaging 28% and in this case, your EAR will be 31.89%. Assuming you pay $50 a month on time and interest rates don’t shift, you end up paying a total of $212.40 for your original $200 purchase.

Being aware of these extra costs will save you from ultimately spending over your limit and finding yourself in credit card debt. The Government of Canada’s Cost of Borrowing calculator provides easy to understand information to help you determine how much you’re really paying when you use your credit card.

Don’t just settle on your current card. Shop around.

Even if you think you’re going to always make your payments on time, unexpected situations occur and bad repayment habits often prevail. That’s why it’s important to shop around for a card that works for you.

Banks, as well as hundreds of other institutions including credit unions, retailers, finance companies and trust companies across Canada offer consumers a range of different products to choose from when it comes to selecting a credit card. Understanding your circumstances and requirements will help you to more easily select the right card for you.

Below is a list to help you when shopping around for the right credit card:

Look for a low fixed-rate card – Some cards have interest rates that can go up at any time. But it’s now getting easier to find cards with low fixed rates or long-term introductory rates. In fact, there are over 60 low-rate cards on the market today!

Look at the penalty rates – You know if you can make your payments on time. If you can, then maybe it’s ok to go with higher penalty rates but lower interest rates. But if you have a habit of making later payments (even by a day) you may benefit from higher interest rates but lower penalty rates (penalties are often quite high, sometimes tripling the original interest rate).

Read the fine print – It’s important to know exactly what type of card you’re getting in terms of interest rates, penalty fees and rewards.

Avoid annual fees – even if your card claims you’ll get better interest rates if you pay this fee, look elsewhere if you’re good at keeping up with payments each month.

Rewards are good when you need them – It might not be wise to settle for a card that offers to help you “pay” for a car if you don’t drive, but it might be wise to select a card that will help you with your groceries each month. When looking at the offered rewards, assess your situation and be honest about how beneficial each offer really is to you.

This holiday season, it’s important not to succumb to the urge to splurge. Replacing credit with debit and cash is a wise decision for those already playing in the game of debt. But if you’re thinking about using credit, remember to approach it like a loan and not “free cash”; only spend what you can afford and be ready to make your payments on time. There are numerous benefits to using credit cards, so long as you use them wisely.

Caroline
PR@RateSupermarket.ca

Related posts:

1. Tips to Get Rid of that Holiday Credit Card Debt
2. Have you received a credit card you never applied for?
3. Canadian Credit Card Rule Changes Update
4. New US Credit Card Regulations Begin Today
5. Finding The Perfect Credit Card

Tags: credit card, interest rate, personal finance