Using Credit Cards to Keep Up With the Cost of Living: What Are the Consequences?

Using Credit Cards to Keep Up With the Cost of Living

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The last few years have not been kind to Canadians’ wallets. Living costs across the country have soared, placing household budgets under tremendous financial stress. Not surprisingly, many Canadians are increasingly relying on credit cards to stay afloat financially. But is it a good idea to do so? 

The simple answer is “no.” Relying heavily on credit cards for day-to-day essentials is a quick fix that can lead to long-term negative consequences. However, at the same time, we understand the dire economic reality many Canadians face. Credit cards can be a valuable tool to cover non-negotiable costs, such as food, utilities, and fuel.

In this article, we’ll outline the downsides of using credit cards to fund everyday living expenses. We’ll also explain how to use them wisely to get by while working towards reducing your debt over the long run.

The downsides of using credit cards to pay for living expenses

Credit cards can be a convenient way to help you pay for rising living expenses. However, if you rely on them liberally for too long, the financial consequence can be severe.

Excessive interest

The principal drawback of using credit is paying the steep interest rate. Credit cards are notorious for charging high interest rates, making your debt snowball quickly. The average rate on a credit card is 19.99%, but some cards charge even more.

You can avoid interest entirely by diligently paying off your monthly credit card statement. But this may prove challenging, if not impossible if you constantly rack up a huge balance. And as soon as you carry over an unpaid balance to the following month, interest charges will appear on your account.

And if you thought 19.99% is excessive, it can go higher. Should you miss credit card payments routinely, your card issuer can apply a penalty interest rate to your unpaid balance. The penalty interest rate will replace your regular rate and can be 30% or higher! The more interest charges hit your account, the more difficult it will be to repay what you owe.

Late payment fees

In addition to interest charges, your card issuer will tack on late payments to your account if you fail to pay on time. Depending on your lender’s policy, these fees can be as high as $40. They’ll also show up on your credit report, making you appear as a risky borrower.

Potential credit damage

Here’s how excessive credit card usage can erode your credit score:

  • Missing a payment or paying late. Your payment history is the most significant factor that affects your credit score (up to 35% of your overall score). Therefore, late credit card payments (i.e. those more than 30 days past the due date) don’t bode well for your credit standing. The higher your initial credit score, the more significant the drop resulting from a late payment. Late payments can remain on your Equifax credit report for up to 7 years.
  • Carrying a high balance on your card. Having a large balance on a credit card relative to your credit limit puts you at greater risk of default. This is known as high credit utilization and will cause your credit score to drop. 
  • Applying for too many credit cards. When you apply for a credit card, the lender will perform a hard credit inquiry on your credit report to determine your eligibility. Unfortunately, each hard inquiry will cause a dip in your credit score (albeit temporary). 

Financial stress and reduced quality of life

Credit card debt can result in severe financial stress for your household. Making financial decisions will be increasingly challenging as interest charges and late fees gobble up your cash flow.

You’ll spend an inordinate amount of time dealing with your finances, leaving little time for other priorities, including your family. Juggling credit card payments alongside rent, groceries, utilities, car insurance, and other costs will become all too common.

The debt can even strain your relationships and jeopardize your job. In the end, you can become financially, emotionally, and psychologically overwhelmed.

What happens if you can’t pay off your credit card debt?

What happens when you stop paying your credit card bills entirely? In this scenario, you’ve defaulted on your loan contract as per the terms and conditions of your cardholder agreement. As a result, your card provider will now take more drastic measures to collect the unpaid balance, including legal action.

What happens if my account was sent to a collection agency?

If you fall behind on your credit card payments for too long, your lender will likely send your account to a collection agency. Typically, this will occur once your account is 90 to 120 days past due. However, depending on how strict your lender is regarding late payments, it can also happen sooner.

Before transferring your debt to the collection agency, your lender will shut down your account. As a result, you’ll no longer be able to charge purchases to your credit card. Your account will appear on your credit report, marked as an unpaid debt sent to collections, resulting in an R9 credit rating, the lowest you can get in Canada. This negative remark will remain on your credit report for six to seven years.

Once the collection agency assumes control of your account, they’ll employ various methods to collect the balance. Usually, you can expect a barrage of aggressive collection calls, but a lawsuit is also possible if you repeatedly ignore payment requests. 

Luckily, there are strict laws in place that dictate what a collection agency can and can’t do to collect unpaid debts.

Funds seized from your bank account

Do you hold a chequing account with the same lender that provided you with your credit card? If so, your creditor can legally withdraw money from your account and apply it toward your outstanding debt.

Banks and other credit card providers can seize funds in your chequing account under the “right of offset,” a typical clause in loan agreements, including credit cards. Your card provider can take your money at their discretion without warning, and they’re not required to ask for your permission.

Lawsuits and garnishments

In the most severe circumstances, your lender can sue you to recover the money you owe on your credit card. Since lawsuits are tedious and costly, they may only pursue this route if the amount you owe is substantial and after they’ve exhausted all other means of collecting the debt.

Should your lender win their case, the court will grant them the right to freeze your bank account or garnish your wages.

In the case of a bank account freeze, you’ll lose the ability to conduct all or most transactions, rendering your account useless. Under wage garnishment, your employer, in compliance with a court order, will deduct a portion of your paycheque and send the funds directly to your lender. The process will continue until the entire debt is paid off.

Tips for using your credit card wisely to pay for everyday expenses

During a period of skyrocketing living costs and stagnant wages, you may have to turn to credit cards to cover any financial gaps. If that’s the case, you can still minimize the risk of falling into a debt spiral by managing your debt sensibly. Here are some tips for doing exactly that.

Pay the minimum payment each month. If you cannot pay off your balance in full, at least pay the minimum on each card. By doing so, your payment will be considered “on time.” Your payment history accounts are the most significant factors in determining your credit score, so avoid paying late to keep it in good shape.

Transfer your balance to a low-interest credit card. A credit card with a low or zero percent introductory rate can help you save money on interest charges and pay off your debt sooner. These cards offer discounted rates for six to 12 months, after which the standard default rates kick in. In addition, you’ll need to have a good to excellent credit score to qualify for one. For this reason, making the minimum payment on your existing cards is critical – you want to keep your credit as pristine as possible.

Avoid cash advances. The interest rate on a cash advance is higher than the one your lender charges for regular purchases charged to your card. In addition, interest will start collecting on your account from the day you withdraw the cash – there’s no grace period.

Implement a repayment plan. Work towards paying off your credit card balance using a sound financial strategy, such as the snowball method or debt avalanche.

Match your payments with your paycheque. Instead of making one lump sum payment monthly, make a series of smaller amounts every one or two weeks. Doing so will alleviate the stress on your budget and ensure you always have enough cash to dedicate to your credit card.

Use an inexpensive cash-back credit card. Avoid using lavish travel rewards credit cards, which usually charge high annual fees. Instead, choose a card like the one offered by Simplii Financial. These cards will reward you with lucrative cash back on everyday expenses like groceries and gas, which you can apply as a statement credit to reduce your balance. 

Here are some additional guides for dealing with debt while living on a tight budget:

How to Manage Debt When Living Paycheque to Paycheque

DIY Debt Relief Strategies: 10 Ways to Get Your Finances in Order

Here are some options for dealing with credit card debt you cannot afford to pay

Sometimes, sound money management, a strict budget, and cautious spending aren’t enough to solve credit card debt problems. If this describes your situation, there’s no shame in seeking help.

Here are a few options to explore to eliminate credit card debt.

Debt settlement

Consider approaching your lender to negotiate a debt settlement on your remaining balance. To maximize your chances of success, ensure your offer is reasonable, and you can meet your new payment obligations. 

Depending on your situation, you may need assistance from a debt settlement agency to arrange a suitable payment plan. While legitimate and competent debt settlement firms exist, you may worsen your financial situation if you hire the wrong one. 

Read our guide on debt settlement to understand the risks of this debt reduction strategy. 

Consumer proposal

A consumer proposal is a debt relief program regulated by the federal government under the Bankruptcy and Insolvency Act (BIA). It enables you to reduce your unsecured debts (including credit cards) by up to 80% and consolidate what remains under a new payment plan where you’ll pay no interest. You’ll make just one monthly payment on your balance and won’t need to give up any assets.

When you file a consumer proposal, you’ll also receive a stay of proceedings, a court order that immediately stops all collection calls, wage garnishments, and creditor lawsuits.

In Canada, only a Licensed Insolvency Trustee can legally administer a consumer proposal on your behalf.


Bankruptcy is the option of last resort for dealing with overwhelming debts. This debt relief solution will wipe out all your unsecured debts, including credit card debt, giving you a fresh start.

Bankruptcy grants similar advantages to a consumer proposal in that the court will shield you from legal action by creditors and halt all collection calls. However, you’ll be required to surrender some of your assets.

Like a consumer proposal, only a Licensed Insolvency Trustee can administer a bankruptcy proceeding.

The bottom line on credit card debt

Using credit cards to pay for everyday expenses that you cannot afford isn’t wise. Over the long run, this habit can lead to severe debt problems and cause immense financial and emotional distress for your household. However, given Canada’s rapidly increasing cost of living, a credit card can be an effective tool to help you keep up with your bills.

The key is to rely on credit cards only for the short term. Never view them as a permanent solution. Along the way, it’s crucial to establish a plan for long-term financial recovery and stability. Work to reduce your debt, boost your income, cut your expenses, and manage your cash flow properly.

If you need a helping hand in tackling credit card debt, book a free consultation with David Sklar & Associates. As Licensed Insolvency Trustees, we will review your financial situation and help you find the ideal solution to escape the credit card debt cycle.

Photo by Darina Belonogova

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If you are overwhelmed by debt, call us at 1-844-962-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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