If you’ve had a credit card, you can probably relate to that feeling of dread when you look at your monthly bill. Sometimes, that low minimum payment can seem like a godsend.
But it isn’t. In fact, only making the minimum payment on a credit card is a trap that can lead to major debt problems.
To address the issue, the Quebec government is requiring that minimum monthly payments on your credit card to be at least 2 percent of the balance owing, until it gets to 5 percent by 2025. New accounts will start with 5 percent minimum payments.
Quebec is the first province in Canada to mandate the percentage of minimum monthly payments. In Ontario, credit card providers must disclose how long it would take to pay off your balance if you only make the minimum payment, but Quebec’s rules go a step further.
Debt experts say rules like these can go a long way towards protecting consumers, especially millennials and Gen Z who are disproportionately saddled with high-interest debt. For young workers who are often precariously employed and have irregular income, the temptation to only make the minimum payment is strong. But that temporary relief is extremely expensive in the long run and can hinder your ability to get good mortgage rates and other types of loans.
Keith Emery, operations director for Credit Canada Debt Solutions, an organization that helps people with credit card-related problems, says people should ignore the minimum payment altogether. Instead, he advises them to make the biggest payment they can afford.
“Credit card debt is bad debt,” Emery said. “You want to avoid carrying credit card debt as much as possible. If you absolutely need to borrow money, it should be through a line of credit or a loan at a reasonable rate of interest—as in single digits.”
In Canada and the U.S., credit cards typically charge around 20 percent in interest, though some, such as retail cards from your favourite store and those offered by alternate lenders, can charge more than 30 percent.
Emery recognizes the lure of only making the minimum payment—especially if you’re cash-strapped and having a tough month. But the reality is that it can be the gateway to long-lasting debt problems.
Credit Canada has a debt calculator that shows how long it would take to pay down your credit card if you only make the minimum payment. For the average person in their 20s only making minimum payments and continuing to rack up credit card debt can take a lifetime to pay off, with most of that going towards interest. If you can’t pay off your balance in full, the smallest payment you should ever make is 5 percent of your total balance owing, Emery advises.
For example, a balance of $1,000 on a credit card with a 20 percent interest rate will take 25 years to pay off if you only make the minimum payment of 2 percent—and it will cost more than $3,000 in interest. For comparison, a 5 percent monthly minimum payment on $1,000 takes 6 years to pay down and incurs $440 in interest.
Emery wants consumers to be skeptical of credit cards, which are “being handed out like candy.” Too often, he sees young people who confuse having a credit card with creditworthiness. But applying for and having too many cards can chip away at your credit score. Emery doesn’t recommend having more than one or two credit cards.
Credit cards are profit machines
“It’s not a deal if you’re going into debt for it, and every time you use your credit card, that’s debt,” said Emery. “If you can’t pay it off by the end of the month, don’t buy it.”
Some cards can even turn on you when you can least afford it. “If you start to fall behind [on payments], then the interest rate will change and get higher," Emery explained. "It feels perverse, in the sense that when you’re having trouble paying, they raise the interest rate.” Emery said people in that situation should see a credit counsellor.
If you’re thinking of getting a credit card, Emery suggests shopping around for the best interest rate. Ask questions about whether or not there is an annual fee just for having the card. Find out what happens to the interest rate if you fall behind on payments. Try to pay off as much of the monthly balance owing—if you can’t handle all of it, try to pay off at least 5 percent.
And don’t be swayed by points or discounts offered on your purchases. Unless you’re making very large purchases and payments on a regular basis, they’re probably not worth it.
“I personally really hate the obsession with points. If you love points, get your points. But don’t get a whole bunch of cards with the intention of getting more points if it leads to you carrying more credit card debt because carrying that will cause you infinitely more debt than you will gain in terms of the points from those cards,” Emery said.
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