5 signs it's time to step away from the plastic

Credit is a great tool - until it's not. Bad credit behaviour can snowball quickly, leaving you with a load of high-interest debt.

Recognize the signs that it's time to put the plastic away and get your debt under control - before it's too late.

1. You're spending more than you usually would just to earn rewards.
With all the rewards credit cards out there, almost everyone can find rewards that suit them. You can earn cash back, or points you can redeem at movie theatres, airlines or your favourite stores. It's great to earn points on items you're already buying - a two-for-one deal. However, the trick is not to overspend just to get your points, or you may be paying more than the benefits from the card are worth. put-down-plastic

"If you're using your card for points, make sure you can pay off the purchases at the end of the month so you can start again," says Elena Jara, director of education at Credit Canada Debt Solutions.

If you're carrying a balance, it's not worth it, she says. Buying extra items just to boost your points could throw off your budget, and make it tough to pay off your balances. Holding a balance means you're likely paying more for interest than the points you're earning are worth.

"You're paying more into it than you're getting out," Jara says.

2. You're using credit to supplement your income.
Pulling cash advances from your credit card or using it to supplement your income is a big sign you should stop using that card, says Del Whittle, a certified credit counsellor at K3C Credit Counselling. If you need to use a credit card to make ends meet and pay for basic expenses month after month, your expenses outweigh your income.

It's worse if you're using your credit card to withdraw cash to pay for things. Cash advances cost you even more than other charges on your card, since interest charges begin from the time you have the cash in your hand, and interest is usually higher for cash advances - that can add up fast.

If you're resorting to credit to fund basic necessities, it's time to revamp your budget or seek free debt help.

3. You can't make the minimum payments.
"When the payments are getting out of hand or beyond your control and affordability, that's a warning sign," Whittle says. "If there is not enough left at the end of the month to meet your credit card payments, you have to start looking at other options."

Explain your situation to your creditors and see if you can rework your repayment plan, she says. If not, you might even be able to get creative and sell some items or take on an extra job to supplement your income.

4. You're using a credit card to pay another card.
Jara says if you're using multiple cards to keep up with your credit card bills, it's time to put away the plastic.

"It's called ‘kiting' or ‘trading off,'" Whittle says, and it's a good indicator that you're in over your head. It's one thing to look into transferring your balance to a 0 per cent interest - this can actually be a great help if you're trying to pay down your debt. But if you're putting the card payment on another card, then continuing to charge to either (or both) cards, you're digging yourself a deep hole, and fast.

5. You've maxed out your cards.
Reaching your limit on your card does not mean it's time to apply for more credit. Instead, it's time to take a serious look at your finances.

"If you've reached the limits on all those cards, that's beyond a warning sign," Jara says. "A lot of people aren't paying attention to their statements every month, so it's time to open those envelopes."

You should be checking your statements diligently each month anyway for signs of fraud, so if you aren't in the habit, start now. You'll get a better sense of how much you charge each month, how much remaining credit you have and how close you are to your limit.

You put the plastic away - now what?
When you realize you're having trouble with your credit, it's time to make a plan. Jara recommends you prioritize your credit card payments to make the most impact.

"You're going to make all the minimum payments, but you can pay a little bit more on one," Jara says. You can pick the card with the highest interest rate to pay back first, or perhaps the card with the smallest balance.

"Also, you can consider consolidating the debt," Jara says. "Usually what you want to do is find a credit card with a really low interest rate so it's affordable to allow you to pay off the debt a lot faster." If you have a line of credit with a lower interest rate you can use it to consolidate your debt, too.

You should also reorganize your budget to include your card payments, even if it means sacrificing some unnecessary spending on shopping, eating out or entertainment.

You might not be able to close your credit card account, and in some cases, it's unwise to do so.

"For instance if you need to travel or rent a car to get to a job interview, then you need that credit card," Jara says. But you'll have to take extra caution when you do use it so you don't fall back on old habits.

"You have to have a plan for tucking away monthly for those emergencies," Whittle says. "A lot of people don't plan for that. They automatically go to credit. And that's not what credit is for. We educate our clients to have a separate savings account for expenses of that nature so that you don't have to resort to a credit card."

See related: Online tools, apps to help you manage finances, The double-edged sword of balance transfers, Consumer proposals offer alternative to bankruptcy
Published December 13, 2016

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