Personal Finance » Debt

Credit cards and lines of credit can make an unhappy retirement

When I was blogging about traveling on a budget it reminded me of how many clients over the years have actually been excited about how many credit cards they have and how large their limits are!

When I sit down with a client one of the first things I do is review exactly where they are in life. To understand their Net Worth I need a list of all Assets and all Liabilities. The difference between the two is known as your net worth. I have had many clients tell me they have no debt, however, when we do a net worth, they actually have a line of credit secured against the home. Most lines of credit compound interest in the same way that a credit card does – daily and interest compounds upon interest. I generally tell clients picture a staircase each day the balance is the next step up the staircase. After 30 days your payment (if you only do the minimum brings you back to the bottom of the staircase). This goes on endlessly like an escalator round and round it goes but nothing ever changes or moves, the months and years go by but the balance never changes. All you have done is give the bank interest!

When I do financial plans for clients, I like to show their debt freedom date and many times it’s a hundred years out. If they followed their own plan they would never have that happy retirement and their golden years are not going to be golden. Instead, retirement would be tarnished with part-time work just to make ends meet.

The good news is that any day is a good day to begin planning. Its time to stop the tidal wave of debts and interest. Once people really understand how debt works it can change them. It is not just the posted interest rate that matters it is the total interest cost of the debt that matters more. The hidden things that are not advertised when people take on debt are usually the more important details. Once people get it, then the banks cannot trick them anymore.

The best scenario is when consumers learn the best way to use the bank’s credit to their own advantage. Of course, the bank wants to give you more credit cards, and a line of credit instead of a mortgage. They love you for the interest you pay them. Many times you get rewarded by the banks by increasing your limits. They are not doing you any favors here. My suggestion is to have the cards eliminated one by one. One little secret many people don’t know is you must call the credit card company and have the card closed. Don’t just quit using it and keep it. When doing a debt to income ratio any credit cards are viewed as if you could go out tomorrow and charge it to the limit. A line of credit should only be used if it is in your best interest otherwise choose a mortgage.

When it comes to mortgages, I suggest the best option is to use a good mortgage broker. They can help you choose a good mortgage which is lower than just the posted rate! Be careful because embedded in the contracts are many stipulations and penalties if you try to pay it off early or accelerate the mortgage.

The bottom line is debt is out of control and the average Canadian is losing the game while the banks are winning the game.


  1. Ken

    Dear Cathy,

    Thanks very much for this great post.

    I have one question – I saw many articles saying “it will decrease your credit score when you close your credit cards, so it is better to keep them without using them.” But in your post, you said it is better to close them instead of keeping them/quitting using them.

    Would you mind shedding a little more light on it?



    • Cathy

      My understanding, I used to do some debt consolidation loans for clients, is a credit card is viewed as part of the debt because you could go out the next day and charge it to the limit. The companies I sent clients to always said it was better to only have what you need. If you need to build a credit rating use it, pay it off, use it and pay it off continually. This shows that you are good with credit and payments. Hope that helps to clarify things.

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