Blair Mantin, a Licensed Insolvency Trustee and Vice-President of Sands & Associates recently appeared on Global News Vancouver. In this segment Blair explains the realities of “Minimum Payment Math” and highlights some examples of minimum payment scenarios that many Canadians face.
Watch our clip below and read on for more information about why minimum payments are not enough to pay off debt.
Some examples of “Minimum Payment Math”
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
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
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
How are credit card minimum payments calculated?
- Minimum payment amounts are calculated differently by various banks; sometimes they may even be different amongst cards and other products at the same bank
- Tip: Your personal credit history can be a factor in the interest rates and card products you are offered!
- Required payments are typically in the range of 1-2.5% of the balance – which might barely cover the monthly interest!
- For example, for one of the largest Canadian banks, the minimum payment is normally calculated as the interest and fees each month, plus $10.00
- That’s right – your minimum payment could be contributing as little as $10 per month to actually reducing your debt load! The rest goes to interest and fees…
What are the disclosure requirements?
- In 2010 the federal government released disclosure rules for credit card companies, aimed at shedding light on how minimum payments work (or don’t work) to get you out of debt:
- The rules required credit card issuers to provide information on the cardholder’s monthly statement on the time it would take to fully repay the balance, if only the minimum payment is made every month.
What should credit card customers consider?
- Think twice before using credit cards unless you’ve already got the money already and will pay the card balance off right away
- Consider the ‘full cost’ of items charged on credit that you don’t pay off right away.
- Be wary of rewards program
- The typical value is 1% of your spend – your interest charges are often much higher in just a single month! You only get the rewards once, yet the interest charges accrue over and over again.
- Avoid taking cash advances
- Interest is charged from the day you take the money out – there is no grace period and often a much higher interest rate!
- Interest costs can be as much as 10% higher on cash advances, along with often a ‘one-time charge’ of up to 3% of the amount advanced. This is very expensive financing!
- Watch out for ‘special’ interest rates
- When you are over your limit or miss payments, card issues will often increase your interest rate significantly, leading to higher interest charges that could be 25% or more than normal rates.
What should consumers do?
- Start paying more than the minimums, ASAP. Here’s a strategy:
- Write down all your debts and minimum payments, then arrange them in order of interest (highest first)
- Decide how much extra you can afford to pay each month and put this towards highest interest card (i.e. make all the minimum payments, but aim your additional funds towards the highest interest debt)
- Continue this plan until you progressively eliminate the debts, always paying the highest interest first.
- The biggest key to success will be keeping a disciplined budget and revisiting it at least monthly to make adjustments:
- Be realistic/honest about how much you’ll put towards debt repayment
- Don’t continue to use the credit, or the cycle will continue (or get worse)
- Leave room for unexpected expenses – life events will happen and having a small amount of savings will help you stay on track
- If all you can pay are the minimum payments, and no amount of budgeting can help that – you may need to seek help from a professional to get off the minimum payment “hamster wheel”.
More about Sands & Associates
Sands & Associates is a firm of award-winning Licensed Insolvency Trustees, with a focus on assisting individuals and small businesses to regain control of their financial affairs. Founded in 1990 and operating from local offices throughout British Columbia, we take pride in our non-judgmental, easy-to-understand approach to providing debt options for residents throughout the province.
Stuck in a never-ending cycle of minimum payments? There IS a better way!
Meet with a professional in one of our local BC offices today to discuss your options for a financial fresh start.