2023-07-20 23:30:00
The 1is August, your minimum credit card payment will increase to 4%. What does this mean for your personal finances?
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Currently, this payment is 3.5%. A few decades ago it was around 5% for most credit cards. Then, it gradually fell to around 2%.
Faced with consumer over-indebtedness, the Quebec government passed a law in 2017 that gradually increases the minimum payment by half a percentage point per year to 5% in 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 for you? If you have a balance of $1,000 and you’re just making the minimum payment, that’s $40 per month. At 3.5%, it’s $35. Peas?
more than the minimum
In fact, if you’re content to pay only the minimum due, you’re setting yourself up for big trouble.
For example, if you owe $1,000 and your credit card interest rate is 19.9%, you will pay zero dollars in interest if you pay the balance in full by the due date. The card issuer will therefore have lent you $1,000 for free for about 21 days. Cheer!
But if you are content to pay only the minimum payment of 4% each month, it will take you 7 years and 8 months to reduce your balance to zero and you will have paid interest charges of $606.72.
For a balance of $5,000 for which you only make the minimum monthly payment of 4%, it will take you 13 years and 3 months to pay it all off. Your credit charges will amount to $3439.30.
For a balance of $200, it will take you 2 years and 1 month to reduce it to zero and you will have paid $44.92 in interest.
Concretely, credit cards lend at insane rates which vary from 19.9% to 22.99% for the most part. I wonder why the federal government tolerates such rates…
In June, the Canadian household debt ratio stood at 184.5%. In other words, for every dollar earned, households had an average debt of $1.85 (consumer and mortgage debt included).
A third of Canadians live paycheque to paycheque, according to the Financial Wellness Institute. In 2022, 11% of employees spent more than their net salary, according to a survey by the National Payroll Institute.
Advice
Simply paying the minimum on your credit cards negatively affects your credit rating. If you’re having trouble paying your balance in full at the end of the month, opt for a low-rate card, put it in the back of a drawer and negotiate a personal loan, or use your line of credit to wipe out the balance. You’ll save a fortune in interest. A good way out is to seek free help from the ACEF budget advisors in your region, by visiting the toutbiencalcule.ca portal. Good to know: for all cash advances made with a credit card, interest applies on the date of withdrawal. If you don’t pay your credit card balance in full, interest applies to all of your purchases, not just the amount that remains to be paid. For example, your January statement shows a balance of $2000, but you only pay $1000. Interest accrues on $2,000 of purchases, or $18.33 if the balance has been paid after 30 days (card rate: 22% / 365 days = daily interest of 0.06111% X 30 days). Your balance for February will therefore be $1018.33. If you only pay $500, your March statement will show a balance of $527.82, or $518.33 + $9.49 in interest. You therefore pay interest on interest, hence the importance of reducing your balance to zero before the due date indicated on the statement.
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