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According to Equifax data last year approximately 59% of Canadians paid off their credit card balances in full each month; so far this year that number has declined to 56%. Although this may seem like a small change, the fact that total consumer debt (excluding mortgages) increased by 5.2% in Vancouver in the last year (the highest among Canadian cities) has led to a situation where more and more people are deep in credit card debt, and only able to make minimum payments.

Enter – the minimum payment trap. Only making your minimum monthly payments on credit card debt means you’re often stuck in a debt repayment cycle – never making meaningful progress towards being debt-free. Vancouver-based Licensed Insolvency Trustee Blair Mantin joined Breakfast Television to help viewers understand the minimum payment trap, and how to get out of it.

Watch the clip and read more below:

Understand Credit Card Minimum Payments

The amount of your required minimum payment will be calculated differently depending on the lender. Sometimes there are even differences between products and cards at the same bank.

Your credit score and history can be factors that influence the interest rates and credit cards you are offered.

Minimum payment requirements are generally somewhere between 1-2.5% of the total account balance – and this might barely cover the interest charges accumulating.

  • As little as $10 of the minimum payment you make might be going towards your balance – the rest could all go towards paying off the interest and fees.

One Canada’s largest banks normally calculates their minimum payment based on the monthly interest and fees – plus $10.  

Minimum Payment Examples | These minimum payment traps can get scary, fast

A $1,000 balance on a credit card that charges 18% interest could take more than 10 years to pay off!

A $6,000 credit card balance with 29.99% interest rate (common for department store cards) could take over 53 years to pay off!

Try this handy Credit Card Payment Calculator from the Government of Canada.

Disclosure Rules for Credit Card Companies

Federal disclosure rules require credit card companies to display information on how long it will take the customer to pay off their credit card balance if only making minimum monthly payments.

Check your credit card bill – this is where you’ll find the required disclosure statement.

Tips for Using Credit Cards

  • If you can’t pay the balance in full right away, think twice before using your credit card to make a purchase
  • Not all rewards programs are worth the cost
    • Rewards program values are normally 1% of what you spend and you’ll get the reward once; your interest costs however will generally be much higher than 1% and will be charged month after month.
  • Avoid taking cash advances, since interest charges start the day you withdraw them
    • Interest charged on a cash advance could be 10% higher, and come with a “one-time charge” of up to 3% of your withdrawal.
  • Always make your payments on time
    • Missing a payment can result in your bank increasing your interest rate significantly, this can also happen when you’re over your credit/borrowing limit.

Strategies to Pay Off Credit Card Debt

  • Pay more than the minimum monthly payments. Here’s how to start:
    • Make a list of all your debts and their minimum monthly payments, then sort them by interest rate – highest first.
    • Budget how much more you can afford to pay each month and pay this on the card with the highest interest rate. You’ll still need to make all your minimum payments each month, but you’ll use your extra payments on the debt with the highest interest!
    • Stick with this plan until you get the debts paid off, one at a time – working on the highest interest cards first.
  • Budget realistically about how much you can (and will) put down on your debt repayments each month
  • If you’re carrying a credit card balance and also putting money away in savings, consider whether this makes financial sense!
    • Every dollar you allow to sit on a credit card balance is the bank’s investment that you are expected to pay back with 20-30% in returns.
  • Stop using the credit cards
    • Leave room in your budget for unexpected costs, these are just a part of life. Having a reasonable amount of savings will help you avoid relying on credit for unplanned expenses.
  • Know when to ask for help
    • If your budget is stretched and you still can’t pay much more than the minimum monthly payments, talk to a Licensed Insolvency Trustee about your options for debt consolidation and reduction. A Consumer Proposal can be a great option!

What would your life look like debt-free? Book your free debt consultation with a knowledgeable debt expert and find out. Sands & Associates has been helping people get a financial fresh start since 1990 and we have local offices throughout BC to serve you.