How to avoid high interest debt: if you carry balances on your credit card, consider alternative methods to reduce your interest costs

Money Digest, Sept, 1999

Credit cards such as Visa and MasterCard charge a median interest rate of 17.5% on outstanding balances. (Even the low cost credit cards start at around 9.5%.) When you don't pay in full by the due date, the interest on the balance is charged from the date of purchases posted to the account until it is paid in full. All this makes credit through credit cards an expensive proposition. Fortunately, there are some alternatives. Here are some suggestions from Consumer Affairs of Industry Canada.

Open a line of credit

One alternative may be a line of credit. It can be either secured, meaning it is backed by assets (eg. equity in a consumer's home) or unsecured. With an unsecured line of credit, the borrower usually gets monthly statements and must make minimum payments against the outstanding balance, plus interest, much like a credit card.

Interest rates are higher for unsecured lines of credit than for secured ones by up to three percentage points. Interest rates on secured lines of credit are often close to the prime rate. Both unsecured and secured lines of credit may offer a cheaper alternative to financing purchases than standard low rate credit cards. Consumers should inquire at their bank, trust company, or credit union as to the specific terms and conditions related to such lines of credit.

U.S. alternatives

Also, the number of issuers of Visa and MasterCard credit cards is expanding. Capital One Finance Corp., MBNA Canada Bank, and Bank One International are three U.S. entrants now operating in the Canadian credit card market. They advertise a low initial rate (in the 5.9% to 9% range) for the first six months followed by rate comparable to that of existing Canadian Visa and MasterCard issuers.

However, there may be some differences in the terms and conditions for these cards as compared to what Canadian banks offer. As a result, consumers should keep in mind the need to assess thoroughly any credit card offer that may be extended to them and be aware of any new types of fees.