What are the alternatives to credit card debt?

In our last post we talked about the danger of credit card debt and how it should be avoided, if possible. But what are the alternatives? As for all things Finance related, it does vary by person but for most people the following represent better choices than racking up credit card debt, from approximately the best to approximately the worst (approximately as even the ranking would vary from person to person).

1. Save. If you can defer your purchase until you have the money to afford it; that is clearly the best way to avoid interest rates charged by credit card companies. But of course, that is not always feasible.

2. Liquidate non-registered investments including TFSA. You suffer a big penalty when you cash out your RRSP so that is never recommended unless you have no choice. But if you have other non-registered investments, it is usually a good idea to sell off those investments rather than going into credit card debt. In addition, unlike liquidating an RRSP, there is no penalty for cashing out a TFSA, and you get the contribution room back the following year. So, you should certainly consider cashing out a TFSA before going into credit card debt.

3. Secured loans. Depending on the use of the cash you might be able to get a lower cost loan secured (guaranteed) by an asset. These loans would typically have an interest rate under 10 percent. The obvious examples are a car loan if you are buying a new car or a mortgage for a house. Less obvious examples include a line of credit secured on an asset (house, investment account or another asset) or an advance on an annuity (insurance payment or even a lottery payout).

4. Unsecured loans. You might be eligible for a personal line of credit based on your income, assets and credit score. While the interest rate will be quite a bit higher for an unsecured loan versus a secured loan, it will still be far lower than credit card interest rates.

5. Liquidate registered investments (RRSP). While we almost don’t want to even say this, if an unexpected expense comes up and you know you are going to have trouble paying off credit card debt quickly (within a few months) then liquidating registered investments may be a better choice than getting into debt on your credit cards. There are penalties for liquidating RRSPs and those penalties may be higher than the cost of credit card debt but the penalties are one time and do not accumulate. This decision should only be made as a last resort, when there are no other options available. There are a couple of instances where you CAN withdraw from your RRSP without penalty – when buying a first home (as long as you pay it back within 15 years) and for training or education (as long as you pay it back within 10 years).

Avoid credit card debt if at all possible by looking to these alternate strategies. And of course, don’t forget about Mom and Dad or rich Aunt Marie – I’m sure they’d be happy to help!

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