In this crazy time of high inflation and strong economic recovery, everything costs more. And this is reflected in the use of credit cards by consumers.
In its latest report on credit market trends, Equifax Canada reports a sharp increase in average monthly credit card spending, which increased by 17.5% in Canada during the first quarter last compared to the corresponding quarter of 2021. In Quebec, the increase is even greater, at 18.4%.
Another significant indicator: the volume of new cards issued by credit card issuers during the first quarter jumped 31.2%.
And as for the average credit limit granted to holders of a new card, it has now reached $5,500, the highest in seven years, according to Equifax Canada.
THE $83 BILLION QUESTION
Last April, Statistics Canada estimated the amount of debt that Canadian households held through credit cards at $83 billion. Up $9 billion from April 2021.
If you’re one of the 35-40% of credit card holders who can’t afford to pay their balances in full every month, be aware that debt through credit cards is likely to cause you in the ditch.
Like a cancer, the credit card will destroy the health of your personal finances.
FIRST OF ALL…
When you don’t pay the monthly balance in full, you should know that you never benefit from the 21-day interest-free grace period that credit card issuers must allow.
In fact, as soon as the balance is not fully paid by the due date, interest charges on new purchases begin to accrue from the end date of the previous period.
Explication.
For example, consider a statement with a current balance of $1,000 covering the period from June 7 to July 4, with a due date of July 25. If you do not pay the full balance of $1,000 by the due date, interest charges on new purchases made during said period (June 7 to July 4) will accrue from the time the transaction is recorded. If the transaction dates back to June 7, it is therefore from this moment that the interest charges begin to run on this purchase. And so on…
INCREASE IN MINIMUM PAYMENT
From 1is next August, the minimum payment on credit cards issued before August 2019 will increase from 3% of the balance due to 3.5%. Thereafter, the minimum payment will continue to increase annually by half a percentage point, to 4% on 1is August 2023, to 4.5% from August 2024 and finally to a ceiling of 5% in August 2025.
Note that credit cards issued since August 2019 are already subject to the minimum payment of 5% of the balance due.
Concretely, here is what represents, as a financial burden, the increase in the minimum payment.
Currently, the minimum monthly payment is 3% of the balance owing. Per $1,000, the minimum payment is $30. Going to 3.5%, the minimum payment will increase to $35.
There is nothing catastrophic in that, we agree!
But the “good” side of the forced increase in the minimum payment is its crucial impact on the number of years required to finally succeed in erasing that pesky credit card debt.
Let’s see the financial impact with a credit card at the rate of 19.9%. The data comes from the calculation tool of the Consumer Protection Office.
- With a minimum payment of 3% of a balance owing of $1,000, it took 10 years and 11 months to pay off the debt in full. And the interest charges were going to be $979.87.
- With the new minimum payment of 3.5% of a balance owing of $1,000, the number of years for repayment will be reduced to 8 years and 11 months. And the interest charges will drop to $747.80.
Increasing the minimum payment required on the monthly balance due by just half a percentage point (from 3% to 3.5%) will reduce the total interest bill by $232 per installment. balance owing of $1,000. And this, by shortening the repayment period of said debt by two years.
And when the minimum monthly payment reaches 5%, i.e. an amount of $50 per $1,000 of balance due from the 1is August 2025, the number of years to repay this debt will decrease to 6 years and the interest charges will amount to $441.87.
Compared to the current minimum monthly payment of 3%, raising the minimum payment to 5% will have the tangible financial effect of shortening the debt repayment period by almost 5 years and saving $538 in mortgage fees. interest per $1,000 debt.
For example purposes, I have limited the calculations to a balance owing of only $1000.
THE MULTIPLIER EFFECT
Depending on your situation, you only have to multiply the previously mentioned figures according to your balance owing to realize what it will cost you in interest charges if you limit your credit card repayments according to the minimum payment. .
Thus, a balance owing of $5,000 will require, starting next August, a minimum monthly payment of 3.5% ($175/month). It will cost you at the end of the repayment of said debt (8 years and 11 months) the tidy sum of $3739 in interest charges.
With a minimum monthly payment of 5% ($250/month), repayment would be spread over 6 years, and interest charges would cap at $2,209.
It remains a poisonous debt!
Solutions to over-indebtedness
- To curb over-indebtedness by credit cards, I suggest that governments raise the minimum payment on balance due 10%.
- Another proposal which seems essential to me. Governments should freeze the amount of interest charges at a maximum rate of 12% on credit cards. This rate is equivalent to 2.5 times the current prime rate of 4.7%.
