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Credit card: beware of the minimum payment 2

Credit card: beware of the minimum payment

Article updated on 15/09/2020
Many people pay only the minimum balance on their credit card each month. A convenient idea? It only seems that way. Because letting interest accumulate can lead to situations that are hard to control.

Summary

  • By limiting yourself to making the minimum payment on your credit card, you are deferring repayment of your purchases. You’ll end up paying a lot more for them, because of the interest.
  • Your credit rating may not be affected by this practice, but your debt may explode. And too high a debt ratio will scare off future lenders.
  • To protect yourself from over-indebtedness, there are a number of good habits you can adopt.

Paying the minimum – not such a good idea

Of course, it can be tempting to only pay off the minimum balance on your credit card each month. In the short term, it feels like we’re paying less. But in the long run, it means there will be more to pay off.

Interest is going up and up

By making the minimum payment on your credit card, you meet your bank’s requirements. There is no risk of getting a call from a debt collector. And it’s always better to pay back a minimum amount than to pay back nothing at all.

On the other hand, by not paying off your full balance, you incur interest. Interest that adds up month after month and adds up to all the other new purchases you’re sure to make.

If you make it a habit, your debt will increase and you will drag it out for a long time. And a high debt ratio doesn’t bode well for lenders, who might be suspicious and refuse you a loan application, such as a mortgage.

In short, even if making the minimum payment on your credit card does not directly affect your credit rating, it can have a significant impact on your ability to borrow.

Purchases that end up costing much more

The main consequence of making only the minimum payment is simple: you pay for a long time. And you’ll be paying a lot of money for it.

Let us take an example. Joanne, 34, decides to pay for her $5,000 appliances with her credit card, which has an interest rate of 20%.

If Joanne just pays the minimum each month (2% of the balance), it will take her nine years to pay off her appliances! Worse yet, if we add up all the interest she will pay, Joanne will have paid $10,840 instead of $5,000. That’s more than double the amount borrowed!

To find out how much your purchases actually cost when you make the minimum payment on your credit card, use our tool to calculate the cost of your credit cards.

A new measure to prevent debt problems

By 2025, the minimum percentage to be paid on your credit card balance each month will gradually increase from 2% to 5%. This change was imposed on financial institutions to ensure that they reduce the risk of over-indebtedness among consumers and to make credit card users aware of their true ability to pay.

Four good habits to avoid indebtedness

1. Make a budget

This is the foundation for financial health. You will see where your money is going and you will be able to make adjustments, if necessary. Our tools are available to help you.

2. Plan your expenses and payments

This is the next logical step. With a good budget in hand, you’ll know what purchases you can afford and you’ll be well aware of the payments you have to make.

3. Pay more than the minimum balance on your credit card

If it’s not possible for you to pay off your balance in full, at least try to pay off more than the minimum balance. The idea is always the same: pay as little interest as possible.

4. Focus on paying your credit card debts

If you have accumulated debts, it’s often a good idea to pay off your credit cards first. Why? Because the credit card interest rate is never to your advantage.

Need a hand to get your finances in order?

If you are under pressure from creditors and your debts are taking up too much space in your daily life, talk to one of our financial recovery advisors. They are experts in assessing your situation and proposing solutions that meet your needs.

Meet with one of our counsellors for free

Don’t ignore a debt problem that’s ruining your life. Let’s work together to help you regain control of your finances.

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