When paying less than your full card balance makes sense

Most financial experts advise paying off your credit card balance in full each month to keep your credit score healthy and avoid paying interest charges. In some instances, however, it's better to pay less than the full amount - or even skip a payment altogether.

These circumstances are rare, and being unable to make your payments may be a sign of a bigger problem - one that many Canadians share. BMO's 2014 Annual Debt Report shows that more than half of Canadian households carry unpaid credit card balances, while a 2014 Canadian Payroll Association survey found that a similar percentage of employees would find it hard to meet their obligations if their paycheque was delayed by just one week.

We asked personal finance experts to give their perspectives on situations when slacking off on credit card payments is warranted.

1. When it's the cheaper of two evils.
Any debt that has a significantly higher interest rate takes precedence over a credit card balance. not-pay-balance

Money management expert Gail Vaz-Oxlade describes "snowballing" as a strategy that focuses on eliminating your highest-interest debt first while ensuring you make minimum payments on other bills to protect your credit rating. Once the costliest debt is repaid, freed-up money is then applied to whichever of the remaining debts has the greatest interest rate.

Another situation is when you're behind on utility bills and service disconnection hangs over your head. Reconnection costs as high as $200 can make paying delinquent utility charges the number one priority.

2. If needs-related priorities arise.
Unanticipated expenses for essential needs can occasionally take precedence over paying your credit card bill in full. For instance, if your car breaks down and you rely on it for travelling to work, you may have to divert funds toward car repairs. Otherwise, you may risk losing wages that amount to more money than the interest that will be charged on your credit card balance. Another example is when you require urgent medical treatment forcing you to pay up front and only later receive insurance plan reimbursement.

But be careful about labelling every setback or urge to replace something as an emergency. Dan Wesley, personal finance blogger at OurBigFatWallet.com, says that not being able to pay your card balance might be a red flag that you're overspending. He adds that everyone should have an emergency fund to cover must-have items such as illness or job loss.

"If there isn't enough cash set aside in your emergency fund, then not making the full credit card payment at the end of the month would make sense as a last resort -- but only so long as there is a definite plan to pay off the balance as soon as possible," Wesley says.

3. During a balance transfer.
Applying for a balance transfer to a new, low-interest credit card is one way to manage high-interest credit card debt, and it means you can avoid paying the old card's balance for that month -- under certain conditions -- says budget travel expert Barry Choi, who blogs at MoneyWeHave.com. However, you will need to make a payment on the new card, or you will incur late payment penalties there.

Provided the transfer is processed before the old card's statement deadline and there are no other outstanding charges, you won't incur interest on the old card's balance for that month. If the transfer is not processed before the old card's due date, though, interest on the transferred amount is payable under both accounts. Also, you will incur (and must pay) transfer fees, which range from 1 to 3 per cent of the amount involved.

Most balance transfers take up to five business days to complete, so be sure to clearly communicate with both the old and new card issuers throughout the transfer process to ensure all payment deadlines are met.

4. After agreeing to a consumer proposal.
A consumer proposal is a way to settle debts by paying creditors what you can realistically afford, with negotiated payments rolled up into one monthly instalment, payable over five years or less.

Scott Hannah, president and CEO of the Credit Counselling Society, says it serves no purpose for qualified applicants who will enter into a consumer proposal within days or weeks to make credit card payments. He points to the required initial fee of about $750 payable to the trustee for filing the proposal in court and distributing copies to the consumer's creditors.

Using a consumer proposal to escape having to pay card balances has its downsides, including a black mark on your credit record that lasts three years from your final payment under the proposal, so carefully consider all options before agreeing to a consumer proposal.

5. When filing for bankruptcy.
Bankruptcy trustee Doug Hoyes says his standard advice is to stop paying credit card bills altogether as soon as you commit to declaring bankruptcy.

A basic principle of bankruptcy law is that all standard unsecured creditors should be treated equally, which means it would be unfair to pay one credit card shortly before going bankrupt while ignoring other cards.

"It's called a preferential payment to prefer one creditor over another," explains Hoyes.

But bankruptcy does even more serious damage to your credit record than a consumer and should only be used as a last resort -- depending on your circumstances, it will stay on your credit record for 7 to 14 years.

Getting real about unpaid card balances
Robert R. Brown, author of the personal finance book "Wealthing Like Rabbits" acknowledges there are myriad scenarios that consumers can dream up to rationalize not repaying credit card bills.

He says there is an inherent danger in suggesting that it's OK to make an exception to a rule because all too often that exception then becomes the rule.

Rather than simply making minimum payments, Brown recommends asking yourself how you got into a financial mess in the first place, taking a closer look at what you actually bought with your credit cards, and then examining more sensible alternatives than spending on credit. Then, find a way to pay, including getting a part-time job (or two), cutting back on non-essential expenses such as cable, or even selling whatever you bought on your credit card and using those funds to repay what you owe.

See related: How to prevent debt from spoiling your wedding; Is Debtors Anonymous the right choice for you?

Published January 22, 2015

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