Minimum Payment On A Credit Card Keeping Canadians In Debt

Making only the minimum payment on a credit card will keep you in debt longer and cost you thousands of dollars.  We all know this logically but have you ever wondered why? It’s because of a little trick that credit card companies don’t want to tell you.  Debt advisors call it the ‘Minimum Payment Trap’.  Here’s how it works:

As your credit card balance falls, so does your minimum payment.That may sound great but it’s not.

A recent Hoyes Michalos – Harris/Decima poll on how to pay credit cards showed that almost 50% of Canadians with a balance on their credit card always or often carry a balance.  More than 1 in 4 of those pay only the minimum payment or less each month. Unfortunately, if you are paying only the minimum payment on your credit card each month it will take you decades, not a few years, to get out of debt.  Let’s take a look at how minimum payments work.

A Minimum Payment Example

Let’s say you owe $28,000 on your credit card. Your minimum payment will likely be something like 3% of the balance or $10, whichever is greater.  In this example, your first monthly minimum payment would be $840.  But by the second month your minimum repayment would be only $815. And by month 10 your monthly minimum payment would be only $639.  By this time you are paying $200 less per month towards your debt and this fake ‘savings’ grows.

While you might like the idea of a smaller monthly payment, paying a falling minimum payment as suggested on your bill will keep you in debt not months, but years longer, and cost you hundreds if not thousands of dollars in interest.

Let’s look back at our initial example.  You start out with $28,000 in credit card debt.

Minimum Repayment

Making the minimum payment on a credit card will cost you almost double your loan in interest – a better option is making a fixed monthly payment until your debt is paid off.

If you pay only the minimum balance each month it will take you 28 years and 4 months to pay off the full amount and you will end up repaying $55,800 in total payments.  That’s $27,800 in interest, almost DOUBLE the initial amount you borrowed!

If on the other hand, you pay $840 each and every month that same debt will be paid off in 3 years and 11 months and your total payments will amount to $39,108 (or $11,108 in interest plus the original $28,000 in debt).  That is a true savings of $16,691.

Why Minimum Repayment Is Tempting

Minimum payments are the lowest amount you have to pay on your credit card debt each month and can seem like a cash flow dream.  Banks usually calculate the minimum payment as a percentage of what you currently owe and the rate is usually only around 3% of your outstanding balance.  The banks like minimum payments because it ensures that you remain in debt longer and pay them more interest.  Debtors think if they are paying the minimum they are working their way out of debt.  This may sound like a great deal but as we’ve seen it can prove to be quite costly.

How To Pay Credit Cards Off

If you owe money on your credit cards, you should make your monthly payment amount as much as you can afford to pay.  Sacrificing a few extras now, to increase your payments, will result in greater rewards in the long term. The more your pay, the faster you will be debt free.

If you find you can’t afford to increase your payments, and you are looking at years of credit card repayments, try our debt options calculator and see how different debt settlement options can help you eliminate your credit card debt and provide you with a fresh start.

Category: Credit Card Debt |

Jan 14, 2013

About Sharon Hoyes

Sharon Hoyes, CA, CPA is a Chartered Accountant and Managing Editor at MoneyProblems.ca writing about personal finance and consumer news and how it affects your debt.

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