Most Canadians use credit cards.
In fact, they can be extremely beneficial if you know how to use them properly.
When you apply for a credit card, you get given a credit limit.
This is the maximum spend you can make with the card.
Now, it’s not uncommon for a credit card company to get in touch with you and offer to raise your credit limit.
This may sound fantastic, and they often phrase it in a way that sounds like they’re rewarding you.
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In effect, you have access to more credit than you did before.
Similarly, credit card companies may offer convenience cheques that you can use for a balance transfer.
In short, this lets you transfer the balance from one card to another, effectively paying off the balance on the first card.
Again, this is put forward as something beneficial that will help you.
Does it make sense to raise your credit limit or do a balance transfer with convenience cheques?
Are these two things as beneficial as credit card companies make you think?
We’ve compiled information on both offers to help you learn more about them and what they mean to you.
Raising your credit card limit
When a credit card company offers to raise your credit limit, they make it sound like the most wonderful thing imaginable.
Instead of having a limit of $2,000, you now have one of $5,000.
Anyone can look at this and think that it’s a wonderful idea.
You gain access to an extra $3,000 of credit that you didn’t have before.
Unfortunately, there are some significant disadvantages of raising your credit card limit:
Increases your spending
The main issue is that having access to more money means you are more likely to give in to spending temptations.
Let’s look at a very basic example.
There’s a necklace online that costs a lot of money, and you couldn’t afford it before.
Now, your increased credit limit makes the purchase more viable.
You give in to temptations and spend a lot of cash on this necklace that you never really needed.
The same goes for making multiple smaller purchases as well.
When the limit is raised, you feel like you can keep buying more and more.
Keeping your limit at a more manageable level is far more beneficial as you aren’t tempted to spend loads of money every month.
This actually links to the second danger of raising your credit limit.
Can lead to debt and increased interest payments
Increasing your credit limit will almost always lead to debt.
This happens when you give in to spending temptations and rack up loads of purchases every month.
Now, your credit card bill is much larger than it used to be.
It’s harder for you to pay, meaning you rarely manage to pay the full balance in one go.
Credit card companies act like your friend by offering minimum payments to avoid any late fees or missed payments.
How lovely of them.
The only problem is that this triggers the interest rate on your card.
Interest gets added to the remainder of your balance, which also gets added to next month’s bill.
This means you start owing more money, which you keep putting off with minimum payments, leading to lots of debt.
Consequently, your credit card starts costing lots of money thanks to the increased interest charges.
This is how credit card companies make money.
They lure you in with a credit increase, knowing that this raises the chances of overspending.
They act like your friend by setting minimum payments, then cash in on the interest.
Avoid all of this by keeping your limit as it is – or possibly even lowering it if you’re already guilty of spending too much.
Affects credit score and future borrowing
Lastly, raising your credit limit can impact your credit score.
This is simply because you start using more of the credit.
As such, you owe $5,000 a month instead of $2,000.
The more debt you have, the worse your score will be impacted.
Additionally, a high credit limit affects any future borrowing.
Lenders are less likely to give you money if you already have a credit card with a huge limit on it.
You’re too risky to them as they have to rely on you paying your other creditors as well as them.
This can be a problem if you need to borrow money for something important – like a loan on your car or a mortgage.
Should you increase your credit card limit?
Increasing your credit limit only leads to negative outcomes.
It’s beneficial to avoid doing this.
Contact your card provider and ask them to stop sending promotions relating to raising your limit as you are satisfied already.
Balance transfer with convenience cheques
Credit card balance transfers are where you use one credit card to pay the balance of another.
This is typically done via convenience cheques.
As the name implies, these cheques are a convenient way of authorizing a balance transfer.
You fill in your details, send it off, and the transaction gets put in motion.
Again, this appears to be beneficial for the consumer.
If you use a balance transfer, it sometimes comes with a low-interest rate for a specific introductory period.
As such, this instantly tempts you into thinking you can save money.
The interest rate is lower than your initial credit card, so surely this means you end up paying less money?
You’ll clear your credit card debt and be free from the clutches of your credit card provider…right?
Sadly, it’s not always like this.
There’s a lot to understand about balance transfers and convenience cheques before you consider them.
The true cost of balance transfers
A balance transfer comes with two costs:
- A fee for the service;
Some of you may look at this and think nothing of it.
Your credit card already charges interest, and the fee can’t be that substantial.
Furthermore, balance transfers come with low-interest rates as an introductory offer.
So, all things considered, it should still cost less than paying off your original credit card?
However, there’s one thing you are unaware of.
Balance transfers and convenience cheques are considered cash-like transactions.
As a result, you start gaining interest on these payments right away.
There’s no grace period as there is with normal credit card payments.
While the initial interest rate might be low, you are charged it as soon as you make the balance transfer payment.
Additionally, you have to factor in that your interest rate can and will go up at some point.
If you haven’t paid off your debts by then, you’re going to end up owing more money with the new interest rate.
Easy to fall into a debt trap
The above points may be hard for you to grasp when they’re written down.
The best way to explain this is with an example.
So, let’s say you have a credit card balance of $15,000 that you need to repay.
Here’s what can happen with a balance transfer using convenience cheques:
- You’re offered an APR of 2%, which is lower than your current credit card APR. the catch is that this only lasts for 9 months;
- Take $15,000 and multiply it by 2% to find how much interest you’ll be charged in one year;
- This works out as $300 in interest;
- Divide $300 by 12 to see how much interest is paid each month;
- This works out as $25 in interest fees every month. Times this by 9 to get $225, which is the total amount of interest you pay over the 9-month low-interest period;
- You add $225 to $15,000, and it gives you the total amount due during this 9-month period;
- This gives you $15,225 to pay, split over 9 months as $1,691.67 per month.
As you can see, that’s a lot of money to pay every single month for 9 months straight.
But, if you managed it, then you would benefit from the balance transfer.
You cashed in on the introductory interest rate and made it work.
Clearly, this is an almost impossible task for most people.
Even with a strict budget, you may struggle to do this.
As such, most of you will fail to pay the full balance after 9 months, triggering the increased interest rate.
In turn, you slip deeper into debt and end up owing more than your original credit card balance!
Should you use balance transfers with convenience cheques?
The only time this makes sense is if you can clearly manage to make all your repayments during the low-interest period.
So, be sure you work out if your budget can handle it.
If you can’t, don’t take the risk as it ends up being too expensive and lands you in deeper debt.
In conclusion, raising your credit limit or seeking out balance transfers both sound attractive.
In reality, they cause more harm than good and present many dangers.
It’s advisable to steer clear of them and seek financial help if you’re struggling to pay credit card debts.
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