Licensed Insolvency Trustees often identify credit cards as being risky for consumers to carry balances on, due to the high costs of borrowing, and increased likelihood of balances becoming unmanageable.
- A recent survey of BC consumers found credit card debt was the main type of problem debt 58% of insolvent consumers had when they filed a Consumer Proposal or personal bankruptcy.
- 62% of individuals polled in the same study also reported that “only making minimum payments” was a key indicator that their debts were becoming a problem.
If you’re one of the many people trying to pay off your credit cards, it’s important to understand the reality of making only minimum monthly payments on credit card debt. Read on to learn how credit card minimum payments are calculated, and why you should avoid the minimum payment trap when trying to clear your credit card debt.
How Are Credit Card Minimum Payments Calculated?
Minimum payment amounts are calculated differently by different lenders – and may even be different amongst cards and other products from the same bank. Your personal credit history can be a key factor in the interest rates and card products you are offered.
Here’s how ‘minimum payment math’ works – and why it can lead to keeping you in debt for a very long time.
Your minimum monthly required payment will be:
- A flat fee (typically $10), plus any interest and fees, or
- A percentage of your outstanding balance, typically in the range of 2-3% of your balance.
- For residents of Quebec, the minimum credit card payment is 5%.
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BOOK YOUR FREE CONSULTATIONThis minimum payment might barely cover the accumulating monthly interest if you’re carrying a balance on your card, meaning you’ll pay more interest over time, and it will take you longer to clear your balance making only minimum monthly payments.
- As little as $10 of the minimum payment you make might be going towards your balance – the rest could all be applied towards interest and fee charges.
Blair Mantin, President of Sands & Associates, explains minimum payment math on credit card debt.
Minimum Monthly Payment Examples
Only making minimum monthly payments on credit card debt often means people get stuck in long-term debt repayment, making payments each month yet never making meaningful progress towards being debt-free. The main reason credit card debt can take so long to pay off is due to the interest that continually accumulates.
Here are some examples of ‘minimum payment math’ that demonstrate how deep a minimum payment trap can become:
Low Interest Credit Card: $5,000 balance with 11.9% interest rate
- Paying minimum payments: 14 years, 7 months to become debt-free
- Interest paid: $2,377
- Total paid to clear $5,000 balance: $7,377
Standard Credit Card: $5,000 balance with 18.9% interest rate
- Paying minimum payments: 19 years, 9 months to become debt-free
- Interest paid: $5,300
- Total paid to clear $5,000 balance: $10,300
Retail Store Credit Card: $5,000 with 29.9% interest rate
- Paying minimum payments: 50 years, 4 months to become debt-free
- Interest paid: $23,262
- Total paid to clear $5,000 balance: $28,262
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Disclosure Rules for Credit Card Companies
Federal disclosure rules require credit card companies to display information on how long it will take customers to pay off their credit card balance if they only make the minimum monthly payments.
Check your credit card statement to see the time it will take you to pay off your balance if you’re only paying the minimum payments. You might be surprised at just how long your balance will take to pay off using just minimum payments.
BC Licensed Insolvency Trustee Blair Mantin shares tips on how consumers can avoid the minimum payment trap of credit card debt.
Tips to Avoid Accumulating More Credit Card Interest
Think twice before using your credit card to make new purchases, especially if you don’t already have the cash available to cover the balance in full. You can also help curb accumulating interest charges when you:
Make Credit Card Payments on Time – Every Time
Missing a payment deadline can result in your lender significantly increasing your interest rate, and this can also happen when you’re over your credit or borrowing limit.
- “Penalty rates” or “special interest rates” can typically hike your annual interest rate to 25-28%.
- Missed payments may also incur a late payment fee.
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Book your free consultation with one of our experts and start living a debt-free life.
BOOK YOUR FREE CONSULTATIONAvoid Cash Advances on Credit Cards
When you take a cash advance on your credit card interest charges start the day you withdraw the money – there is no interest-free ‘grace period’ as there is with typical purchases.
- Interest charges on a cash advance could be up to 10% higher than your standard interest rate, and may come with a “one-time charge” of up to 3% of your withdrawal.
- Cash advance charges can also include “cash-like” transactions such as buying lottery tickets, online gambling wagers, prepaid cards, etc.
Always Pay More Than the Minimum Payment on Credit Cards
If you can’t pay the full balance due right away, increasing your monthly payment by even a small amount will substantially shorten the time and cost that it takes for you to clear your credit card bill.
Here is an example comparing payment strategies for a credit card with a $5,000 balance and 18.9% interest rate:
Making only minimum monthly payments: 19 years, 9 months to become debt-free
- Interest paid: $5,300
- Total paid to clear $5,000 balance: $10,300
Making fixed $200 monthly payments: 2 years, 9 months to become debt-free
- Interest paid: $1,405
- Total paid to clear $5,000 balance: $6,405
Try the Credit Card Payment Calculator – Financial Consumer Agency of Canada
Get Help With Credit Card Debt
If you are continually relying on your credit card to bridge the gap between your income, debt payments, and outgoing expenses, or you can’t afford to pay much more than the minimum monthly payments, talk confidentially with a Licensed Insolvency Trustee about your options for consolidating and reducing your debt. For example:
- Consumer Proposals can be an ideal way to consolidate all your debt and cut your balances down to what you can afford to repay over a period of up to five years – interest-free.
- For situations where you are experiencing significant hardship and can’t afford to repay your debts, personal bankruptcy may offer you the relief you need.
- A Licensed Insolvency Trustee local to your province can also offer you specific information about your rights and resources that can help you get out of debt for good.
Sands & Associates offers free, non-judgmental consultations to consumers across BC, and in just 30 minutes we can help you get a debt-free plan that’s right for you.
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Book your free consultation with one of our experts and start living a debt-free life.
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