A Guide to Correcting Credit Card Debt in Canada

How much credit card debt is OK for you?

There are two basic ratios that you can leverage to determine if you have taken on too much credit card debt:

1. Credit utilization ratio: Helps you determine how much of your available credit you are using

2. Debt-to-income ratio: Helps you determine your ability to repay debt

Your credit utilization ratio is calculated as follows:

Current total balance ÷ total credit limit = credit utilization

Credit utilization may impact your credit score, so you need to keep track of it.

Your debt-to-income ratio is calculated as follows:

Total monthly debt payments ÷ total gross monthly income = Debt-to-income (DTI) ratio

Your gross income is the amount you make before your employer makes any deductions from your paycheck. The lower your DTI ratio, the more likely lenders will consider lending you more money.

How can high credit card debt affect you?

Credit card debt can affect you in many ways and having high balances multiplies that effect. If you do not meet the monthly payments, you may forfeit the ability to earn rewards with the credit card provider, which may have been the reason you signed up for the card in the first place. Additionally, if you are looking for more credit and have a high amount of debt, that may put you at risk of not being able to obtain new credit in the future.

How to reduce credit card debt

There are several ways that you can go about reducing your debt, all of which can be applied individually or in conjunction with one another.

Your credit history and ability to repay a personal loan may help you find interest rates that may be lower than your credit card. By using a personal loan to pay off your existing credit card debt, you can consolidate your bill payments and potentially reduce your monthly bills by spreading the payments out and by lowering the interest charges against your debt. American Express Personal Loans is offered to pre-approved Cardmembers.

Debt snowflaking is a method that encourages individuals to find small day-to-day savings to put against their debt. Sums as small as $5 can add up quickly over a year. If you skip a coffee, consider putting the money saved against your balance. You’ll be surprised how fast it adds up.

If your credit card debt is spread across multiple accounts, the snowball or avalanche method can help you put all your resources to the smallest balance (snowball) or highest interest rate (avalanche) card. As you move that first card to a zero balance, you simply move that entire payment to the card with the next lowest balance or highest APR. This strategy can help you build momentum in your debt reduction plan. While snowball helps you attack your smallest balance first to get rid of the one account balance, using the avalanche method by working on the account with the highest APR will save you more money in interest charges over the lifetime of your debt

How to avoid credit card debt 

Avoiding high amounts of credit card debt is a financially prudent decision that many people look to implement. There are easy tactics to use that can help you to avoid large balances on your credit card.

A budget can be an excellent financial tool when looking to minimize the debt you accrue. You should aim to make sure that you aren’t spending more on your credit card than you can pay off on a monthly basis. If there’s a purchase that doesn’t fit into your budget, consider different payment options that you may be eligible for, such as an installment plan like Plan It.

In addition to this, if you are carrying a balance on your credit card, it’s important to ensure that you are including a payment of more than the minimum in your monthly budget.

Credit card companies will send you a statement that outlines exactly what was charged to your credit card, the amount you must pay (minimum payment), and the date you need to pay that amount by. You should always try to pay more than the minimum payment due, but more important is paying at least the minimum amount on time. With American Express, Cardmembers can set up a pre-authorized payment plan – this is a great way to help you stay on time with your payments. This will help ensure that you do not become delinquent on your account.

The best practice when it comes to credit cards is paying the balance in full each month. The minimum amount you must pay will be outlined on your credit card statement but paying more than the minimum lowers your credit utilization, could help your credit score, and ensures you become debt free faster.

Cash advances typically have a higher interest rate than other credit card purchases, and in many instances, you do not get protection on the purchases you make using a cash advance. You also will not accumulate any rewards for these purchases.

Choose the right credit cards for your needs

Avoiding debt is important in a world that revolves around money and financing, especially if you have large purchases ahead of you. To ensure that you are keeping your debt low, it’s important to pick the right credit card for you. For example, using a card with no annual fee may be more cost-effective, depending on your spending habits and financial goals.