Going Cardless

Posted on Wednesday 05 November 2014

Going Cardless

Credit card debt casts a long shadow over Canada. According to a 2013 report by RBC Economics, Canadians owe a total of $73.7 billion to their credit card companies. For reference, that is more than a quarter of what the Canadian federal government spent that year. So, how can you avoid becoming a statistic? How can you prevent yourself from sinking deeper into debt ?

For some Canadians, the answer is to avoid credit cards entirely. No credit card means no credit card debt. Should You Give Up Your Credit Card? The answer to that question is no, probably not. Credit cards are dangerous, but for the financially disciplined, they have a lot of uses.

First, they offer security that cash and debit cards cannot, in the form of chargebacks and fraud protection.

Because the money isn’t removed from your account immediately after a transaction and because credit card transactions leave a data trail, you have far more recourse if your card details are stolen or if a retailer fails to deliver your product.

Furthermore, a cash-only lifestyle is dangerously inflexible. A credit card has the distinct advantage of allowing you to spend money that you don’t already have. Wages might come every two weeks, but emergency costs don’t respect your payment schedule. Your car can break down at any time. While emergency loans do exist , a credit card is far more convenient.

Third, credit cards are ideal for building a credit history . Borrowing money and then repaying it every month looks very good on your credit report, and the buy-in cost for using a credit card is far lower than other ways to build a credit rating like taking out a car loan. Of course, credit cards can build bad credit just as quickly as they build good credit, so if you can’t trust yourself to use your card responsibly, this is another very good reason to go without.

Typically, having bad credit is worse than having no credit at all, as having no credit is easy to fix while bad credit can take years to repair. While financial services exist for people with no credit or bad credit , they are rare and tend to be restricted. However, there is one set of circumstances under which you should give up your credit card. If your credit card spending is running out of control, your attempts to rein in your spending have failed, and your debt is mounting, it’s time to give up the credit card to limit further damage.

At that point, the convenience is outweighed by the mounting debt, and the only credit history that is being built is a bad one. Cash-Only Compromises Even if going totally cardless isn’t the right solution for you, going cash-only in a limited fashion can really help you to meet your budget every month. Necessities such as food and fuel aren’t the best place to try this kind of experiment, but it can really help you to keep non-essential spending categories such as leisure and eating out under control.

For discretionary spending categories like this, instead of swiping your credit card, build an envelope of cash at the start of the month. When you go to see a movie or go to a restaurant instead of cooking dinner, use cash from the envelope. When the envelope is empty, you stop spending on those activities until the next month. It’s a simple trick, but one that is frequently recommended by financial advisors. If you have trouble with budgetary discipline, give the envelope of cash a try.

For a more restrictive but also safer take on the envelope system, try budgeting on a weekly or biweekly basis. Any impulse spending spree will have to be smaller and therefore less damaging, as there is less cash in the envelope to be spent. It also takes away the risk of spending your entire discretionary budget within the first week and not being able to go out and have fun for the rest of the month.