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Credit cards and the cost of making minimum payments

October 31, 2022
min read

Helping you get the most out of your credit card and avoid the stress of being in debt. Minimum payments seem inviting but could be doing you more harm in the long-run.

A Little Credit History

Canadians have been using their credit cards increasingly. With more travel options and activities available, spending and credit card borrowing has increased. As a result, the average spending on credit cards rose 17.5% in the first quarter of this year compared to last year.

Spending is rising, but so are interest rates. Rising interest rates are making it difficult to repay debts and can

cause financial stress for the average Canadian. For younger people, the pressure to pay off debt is increasing. For people 25-34 years of age, the consumer debt that isn’t being repaid rose by 20% from the last quarter. So how can you make better decisions about your borrowing and spending? We’ll walk you through some of the pitfalls to avoid when it comes to your credit cards.

Minimum Payments

Minimum payments are the minimum amount that you must pay. This amount is usually paid monthly to a credit card. If you’re making the minimum payments, you are likely paying mostly the interest any only a little of the principal amount, meaning the amount owing remains essentially the same, month after month.

For some, staying on top of your debt means making only the minimum payment. Paying only the minimum may seem appealing; after all, you’re meeting your obligations while still having money for other expenses. It does, however, come at a high price. Not only will it take a considerable amount of time to pay off your debt, but the amount of interest you pay over time will be staggering.

Why You Should (at the very least) Make the Minimum Payment

  • So you avoid late fees or any penalties
  • So your annual interest rate does not increase
  • So you don’t have any missed payments reported to the credit bureau
  • So that you can still get rewards or other benefits included with your credit card

Our advice? It’s probably best to make more than the minimum payment. If you can, pay off your credit card completely so you can avoid interest charges. We also recommend keeping your credit card debt lower than 30% of your limit. This shows that you have good financial management skills, and reflects positively in your overall credit utilization, a key metric on your credit bureau.

Making the minimum payment will keep your credit score positive, but if your credit card is maxed out, it can negatively impact you. In addition, when you make the minimum payment, your debt remains high, depending on how close you are to your credit limit; this can impact you.

Let’s Break it Down

In the example below, with a credit card balance of $5,000 would take over 18 years to pay off your card while paying $5,854.39 in interest alone. That means you paid $5,854.39 in addition to the $5,000. To put things in perspective, if you bought a car for $5,000 with your credit card and made only minimum payments, you would pay a total of $10,854.39 for a car worth $5,000! By comparison, committing to equal monthly payments of $150.00 would have your card paid off in 50 months (just over 4 years). Interest paid during this time would be $2,357.06.

Scenario Credit card balance: $5,000
Interest rate: 19.99%
Minimum payment: 3% of balance
Months to pay off debt: 220 (18 years)
Total interest paid: $5,854.39

Make a Plan

Figuring out the total amount of interest you’re paying over time may be just what you need to buckle down and pay off your card sooner. This could involve paying more than the required minimum, switching to a low-interest card or consolidating your debt with a personal loan which typically comes at a much lower interest rate. Whatever you decide, there is no better time to start than right now.

Check out our PayOff Debt Calculator to see how much you can save on interest with a personal loan, at a interest rate lower than your credit card. If you need a little guidance, a Cambrian Advisor can meet with you to help you understand your options.

Today’s Rates

*All rates and yields subject to change without notice.
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