1um August your minimum payment by credit card increases to 4%. What does this mean for your personal finances?
• Also read: Your credit card balance: The minimum deposit increases from the 1stum August
• Also read: Holidays abroad: what tip to give in which country?
Currently this payment is 3.5%. A few decades ago it was around 5% for most credit cards. Then it gradually dropped to around 2%.
Faced with consumer over-indebtedness, the Quebec government passed legislation in 2017 that would gradually increase the minimum payment by half a percentage point per year to 5% over two years.
Note that the minimum payment for all new cards issued by financial institutions is already set at 5%.
What does this 4% minimum mean to you? If your balance is $1,000 and you only make the minimum payment, that’s $40 per month. At 3.5% it’s $35. Peas?
More than the minimum
If you settle for just paying the minimum amount due, you’ll be in big trouble.
For example, if you owe $1,000 and your credit card interest rate is 19.9%, you pay no interest if you pay the balance in full by the due date. So the card issuer loaned you $1,000 for free for about 21 days. To cheer!
However, if you’re happy just paying the minimum 4% payment each month, it will take 7 years and 8 months to reduce your balance to zero and you’ll have to pay $606.72 in interest costs.
For a balance of $5,000 that you only make the minimum 4% monthly payment on, it will take you 13 years and 3 months to pay it all off. Your loan fees are $3439.30.
With a balance of $200, it took you 2 years and 1 month to reduce it to zero and you paid $44.92 in interest.
Specifically, credit cards lend at insane interest rates, ranging from 19.9% to 22.99% in most cases. I wonder why the federal government tolerates such tariffs …
In June, the Canadian household debt ratio was 184.5%. In other words, for every dollar earned, households had an average debt (including consumer and mortgage debt) of $1.85.
According to the Financial Wellness Institute, a third of Canadians live paycheck to paycheck. According to a survey by the National Payroll Institute, 11% of workers spent more than their net pay in 2022.
Advice
- Just paying the minimum amount on your credit card has a negative impact on your credit score.
- If you’re struggling to pay off your balance in full at the end of the month, opt for a low-interest rate card, put it in the back drawer and take out a personal loan or use your line of credit to make up the balance. You’ll save a fortune in interest.
- A good way out is to get free help from the ACEF budget advisors in your area by visiting the toutbiencalcule.ca portal.
- Good to know: For all cash withdrawals by credit card, interest is charged on the day of payment.
- If you don’t pay off your credit card balance in full, you’ll accrue interest on all of your purchases, not just the amount you owe. For example, your January statement shows a balance of $2,000, but you only pay $1,000. Interest is charged on purchases of $2,000, or $18.33 if the balance is paid after 30 days (card rate: 22% / 365 days = daily interest of 0.06111% x 30 days). Your balance for February is therefore $1018.33. If you only pay $500, your March bill will show a balance of $527.82, or $518.33 + $9.49 interest. So you’re paying interest on interest, which is why it’s important to reduce your balance to zero before the due date stated on the statement.