For many Canadians, perhaps the most unpleasant piece of mail they receive is their monthly credit card statement.
They say bad news come in threes, and credit cards tend to come at least in pairs – according to monitoring agency Transunion, the average Canadian had an average of two credit cards during 2015, with an average credit card debt of almost $4,000.
Other figures from Abacus Data show that about half of Canadians say they pay their balances in full every month, which means there are still a lot of people who likely don’t look forward to seeing how much further they are in the hole.
But, like mutual fund or bank statements, having a grasp on the information you receive from your credit card company is crucial to your monetary health, if for no other reason that it serves as a reminder to get your financial house in order.
Besides, it’s all too easy to let credit card debt run away from you and that is primarily because of the substantial interest rates so many cards charge.
Those that have an annual fee typically have a lower interest rate but many Canadians have the standard garden-variety card, whether it’s Visa or MasterCard. Such cards generally charge about 20 per cent annual interest. It’s even higher for department store cards. The Bay, for example, charges just under 30 per cent for its store card.
Think about that for a moment. That means that there is an annual interest rate charge of $200 for every $1,000 of debt based on a 20 per cent interest rate.
Statements also offer a good dose of reality for those Canadians juggling several cards and only paying the minimal amount. Card statements now offer a grim reminder of how long it will take to pay off your balance if you only paid that minimum amount.
For example, let’s say you have a balance of $300. The minimum payment is $16 (typically calculated by charging $10 plus interest and fees). Your statement would tell you that it would take two years and eight months to pay it off. But during that whole time you’re also paying a substantial amount of interest to the financial institution.
The statement will tell you when you must make a payment, since skipping the due date can be very expensive.
Many card issuers will jack up the interest rate by several percentage points if the payment isn’t received within the standard 30-day window.
To avoid this, you may want to consider having your financial institution debit your bank account for the minimum payment every month. That way, you can concentrate on paying extra money in order to get your balance paid off.
Another reason why you want to make sure you read your statements is in case your card was hijacked. You may only realize someone has been using it through your statement.
The good news is that credit card statements are fairly straightforward.
Unboxing Your Credit Card Statement
Let’s look at a typical credit card statement to understand how it breaks down.
The first thing you’ll notice is that it’s divided into three primary areas – Payment Information, Activity Description and Calculating Your Balance.
PAYMENT INFORMATION
Front and centre here is what the financial institution expects in the way of a Minimum Payment. In this case it’s $16. This will also tell you when it’s due. And if they say March 1, they mean the first of the month, not two weeks later. Ignore this deadline at your peril – your already high interest rate could become even more onerous.
This area also outlines what your credit limit is. Financial institutions are also fond of telling you that you’ve won the jackpot – they’ve decided to up your limit without you even asking. That’s fine and well but don’t be afraid to turn it down. They won’t take it personally and you won’t be tempted to ratchet up your credit card spending.
Right below that is the figure telling you how much available credit you have. Let’s hope you haven’t maxed out your card and the figure is only a couple of dollars.
The next set of numbers are the ones you should never forget in using the card – it’s the annual interest rate for purchases. Perhaps you have been impressed by the ease with which you secured your credit cards. Don’t be. A big reason for the high interest rates on credit cards is the fact that it’s not that tough to get a card. Also, the high rate reflects the payment default rate. You want a much lower rate? Try to get a line of credit at the bank. The qualification process is much more rigorous.
You will also notice that cash advances are charged an even higher rate of interest, typically 2.5 to three percentage points more than the basic annual rate of interest.
Next up is Estimated Time to Pay. Some consumers were lulled into a sense of complacency by thinking they could just pay the minimum payment and the balance would be paid off eventually. But in recent years, financial institutions have had to insert this estimation just so you understand just how long it will take. This statement shows the cardholder has a $333 balance. It would take this person two years and eight months to pay off if only minimum payments were paid.
ACTIVITY DESCRIPTION
Here you see what you’ve paid to the bank recently, what you bought over the last month and what interest you are paying.
The Previous Statement Balance from the month before was $349.71.
You comfortably exceeded the minimum payment in the previous month by plunking down $50 on your balance.
You only made one purchase during the month – $28.25 to WestJet.
You are being charged $5.21 in interest.
Your Net Amount of Monthly Activity comes out to -$16,54 ($349.71-$50+$28.25+$5.21), meaning your Total New Balance is $333.17.
CALCULATING YOUR BALANCE
Your Previous Balance was $349.71.
Your Payments and Credits total $50.
Your Purchases and Other Charges amounted to $28.25.
You didn’t take out any Cash Advances.
This card doesn’t require a fee so you didn’t pay any during the month.
The Sub-Total (combining purchases and interest) comes out to $33.46.
And your New Balance is $333.17.
