More than ever in 2011 Canadians were faced with choices when picking a reward option on their credit card, from free groceries, to gas station points to travel reward miles, there was something for everyone.
Cash is King
The card that grew the most in popularity in 2011 was definitely the cash back reward credit card. Card companies including MBNA, Desjardin, HSBC along with Canada’s big five banks, all offer their version of a cash back card with refund rewards ranging from 1-5%. Here customers get a monetary reward for each dollar they spend on their credit cards.
MBNA, for example, offers 5% cash back on qualifying net retail gas and grocery purchases for the first 6 months and 3% after that. It also gives 1% cash back on all other qualifying net retail purchases. Recently we did a bit of research and found that the average Canadian household can save $562 in the first year by using a cash back credit card for their purchases. Over 5 years, that savings builds to $2,382. (Check out our handy Cash Is King Infographic)
Changing Rules for Credit Card Providers
Looking back this year, the credit card landscape has changed dramatically. Particularly since late 2010 when new credit card rules fully came into affect.
The new rules attempt to make the credit card industry more transparent by mandating that a minimum 21-day interest-free grace period be given on all new credit card purchases when a customer pays the outstanding balance in full. Also, credit card providers have to provide information on the cardholder’s monthly statement on the time it would take to fully repay the balance, if only the minimum payment is made every month. For example, a balance of $1,000 on a credit card that charges 18% could take more than 10 years to pay off. And companies must give customers more notice if their interest rate will be rising.
Also, during the application process companies must provide a summary box on credit contracts and application forms that sets out key features, such as interest rates and fees. All these rule are good for a consumer who is conscious of their financially situation.
But there is still mounting evidence that Canadians are getting into more debt than they can handle.
Consumer Debt Levels Soar
A new Statistics Canada survey shows as Canadians struggle in these tough economic times they are taking on more debt. The latest survey released in December 2011 shows the average household debt in Canada hit a new record high of almost 153% of disposable income in the third quarter, a sizable jump from 150.7% the previous quarter.
According to Stats Can, the ratio of household credit-market debt – which includes mortgages, consumer credit and loans – to personal disposable income has climbed to 153% in the third quarter from 147% in the first quarter. That’s the highest level since Statscan started gathering figures in this category in 1990. Economists predict the number for the Q4 could be even higher as Canadians have shown no sign they are paying debt off.
A Plea for 2012
Rewards are great but at what cost? One of the bi-products of these attractive credit cards is Canadians are more likely to put more purchases on them. This coupled with lower interest rates is creating the perfect storm for debt addicted Canadians. Going into 2012 it’s important to understand the rewards being offered on our cards and if they are worth it.
The best way to tackle our debt problems is to start paying off our loans. Start with the highest interest loans, like credit cards and store cards. Work your way down to the line of credit and your mortgage. Its a simple message that we have all heard before.
Also, Canadians have to stop spending. This week skip the Boxing Day sales, focus on how you’re going to tackle your debt in 2012, make a financial plan or a budget and start putting it to work right away. Make a small commitment to yourself to save money, such as I’m going to take my lunch to work, I’ll take the bus rather than drive or instead of that luxury Caribbean holiday this year the family is taking a road trip somewhere in Canada. The beauty of getting yourself on the path to financial freedom is you can start right now.