Who's in charge?

How to tell when it's time to give your credit cards a time out

By Gail Vaz-Oxlade

February 5, 2007

Boy, do we love our credit cards. Guess how many Visas and MasterCards we have tucked away in our wallets? Some 49.4 million. Yikes! Add in the American Express, store cards, gas cards, ohhh...my brain hurts. But hey, there's nothing to worry about, right? After all, who'd actually want to carry balances on all those cards?

Well, us. According to the Canadian Bankers Association, in October 2002, we were carrying almost $44 billion in balances on our Visas and MasterCards. So, why do we continue to charge up a storm when we're already in debt? Here are the top six myths we hang on to lest we be forced to give up our credit cards:

More is better?

Myth 1 "The credit card companies wouldn't send me applications in the mail if I couldn't afford it."
The sad reality is that credit card companies love people who carry a balance. And as long as you're perceived to be a reasonable credit risk, they're more than willing to add another card to your stack, or to jack up your limit.
Myth 2 "The more cards I have, the more financial security I'll have."
Nope. The more cards you have, the more temptation there is to spend, the harder it is to keep track of what you owe. The more available credit you have, the more likely you'll be turned down when you need a loan for a good reason, like buying a house.

Pay it later?

Myth 3 "It's OK if I take a cash advance to keep me from falling behind on my payments."
You're just ratcheting up your credit card costs since the minute you take a cash advance, the credit card interest meter goes on.
Myth 4 "I'll use my home equity line of credit to pay off these credit cards and then everything will be fine."
Maybe, if you toss those cards behind the fridge until that line is paid off. If you go out and charge up a new balance, you'll just have twice the debt.
Myth 5 "As long as I make the minimum payment each month, I'm proving that I'm creditworthy."
Very true. But you're also paying through the nose in interest. If you have a no-fee Visa and carry a balance of $2,500 for five years, you could pay more than $2,300 in interest. Even with a low-rate card, you could still pay $1,237.50 in interest over five years.

The easy way out?

Myth 6 "If my debt gets to be too much, I'll just file for bankruptcy."
Sounds simple, doesn't it? But going through bankruptcy is a nightmare. And the hangover lasts for seven years.

Reality check

No, you're not a loser and a failure if you run into credit card trouble, just misguided and uninformed.
Remember: credit isn't bad. It's just a tool. It can help you get the things you need and want. But you have to understand how it works. Credit cards are really only the right choice when you have the money to pay off your balance in full every month. If you have to carry a balance, try another form of credit that's less expensive, such as an instalment loan or a personal line of credit. Step 1 in moving out of the quagmire is to recognize the credit card myths. Step 2 is to make a change. For some strategies on that front, check out Debt busters, below.

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