Using a credit card installment plan to pay off debt is generally not a

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Clearing purchases from your card months or years later can be tempting, but it’s not for everyone

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Installment plans have been around for a long time, but they’ve grown to cover a wider variety of purchases.

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While traditional installment plans required long application processes and were only used for large items, today they offer much greater flexibility and can be used for almost any purchase over $100.

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The question is whether exercising this option is a financial victory or misfortune.

What is an installment plan and how does it work?

Installment plans work like a model buy now, pay later (BNPL). This means you earn the right to use an item before paying for it by agreeing to a fixed payment schedule, which may also include fees and interest. In Canada, installment plans can be accessed through two different types of providers: third-party fintech companies and your credit card banking institution.

Third-party fintech companies are partnering with online retailers to offer their services to consumers. For example, the Canadian clothing retailer Aritizia has partnered with the well-known company BNPL After-payment to allow customers to pay in four installments, which are billed every two weeks at no additional cost. Benefits after payment by earn commission of Aritizia for each sale using their service. Other popular BNPL third-party companies include Paybright, Klarna and Sezzle, all of which have different terms and conditions.

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Credit card payment plans work a little differently. Once a qualifying purchase reaches your account, your provider will offer you different payment schedules, which can range from three months to two years. Each vendor will have a different cost breakdown.

Longer payment schedules generally charge more interest. Once agreed, the installment plan details will be accessible via online banking and your scheduled monthly payments will be added to minimum credit card balance due each month.

Which Canadian banks offer installment plans to their credit cardholders?

The big five Canadian banks offer installment plans to their credit card holders. Eligibility criteria are minimal as long as your credit card is in good quality, which means you are used to paying it back on time and you are the primary cardholder. However, some programs do not currently offer any packages to residents of Quebec, including TD Payment Plan.

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Similarities between the different installment plans offered by Canada’s Big Five include a $100 minimum purchase price, flexible schedule options, and the ability to pay off the plan in full at any time.

There are differences in the distribution of costs, including variable fees and interest rates. For instance, On time CIBC has a one-time installment fee of 1.5% of the purchase price for each new plan. Then there is a variable interest rate schedule of 5.99% for six months, 6.99% for 12 months and 7.99% for 24 months.

Relatively, TD Payment Plan offers zero interest on the initial purchase, but an escalating fee schedule of 4% for 6 months, 6% for 12 months, and 8% for 18 months.

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What are the risks and benefits of registering?

An installment plan is best used for emergency expenses. In these cases, users may pay less interest on the purchase than they would with a credit card. Even though the interest rate of a credit card can be as low at 8.99%, the average is 19.99%. Installment plans won’t affect your credit score either, unless you miss a payment.

Despite these benefits, some financial experts say installment plans encourage poor budgeting. Certified Financial Advisor Jessica Moorhouse calls installment plans a “band-aid solution.” Although they can help consumers in a pinch, Moorhouse’s opinion is that “they are not a solution and if you use one of these (plans) it should be a red flag” that you need to take a closer look. your budget and the overall financial situation.

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In a 2021 study conducted by the Financial Consumer Agency of Canada (FCAC), 39% of BNPL users said they used the service because they “couldn’t pay for the entire purchase right away”. Installment services should not be used to consume beyond your means or replace a emergency fund.

Moorhouse views credit cards as a tool to increase your credit and earn you rewards. Any service beyond that is likely intended to benefit you instead. While installment plans can help bridge a gap for consumers between paychecks, they shouldn’t be used often and only out of necessity.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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