The cancer of credit card debt

The cancer of credit card debt

UPDATE ; DAY

In this crazy time of high inflation and strong economic recovery, everything costs more. And this is reflected in consumers' use of credit cards.

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 was even stronger, at 18.4%.

Another significant indicator: the volume of new cards issued by credit card issuers during the first quarter jumped by 31, 2%. 

And as for the average credit limit granted to new cardholders, 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 indebtedness through credit cards is very likely to drag you into ruin.

Like a cancer, the credit card will destroy the health of your personal finances.

FIRST…

When you don't pay in full monthly balance, you should know that you never benefit from the 21-day interest-free grace period that credit card issuers must grant.

Indeed, 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.

Explanation.

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 interest costs begin to accrue on this purchase. And so on…

The cancer of credit card debt ;dit

The cancer of credit card debt

MINIMUM PAYMENT INCREASE

Starting August 1, 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 at the rate of half a percentage point, to 4% on August 1, 2023, to 4.5% from August 2024 and finally to a cap 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 charge, the increase in the minimum payment.

At present, the minimum monthly payment is 3% of the balance due. Per $1,000, the minimum payment is $30. Going to 3.5%, the minimum payment will increase to $35.

There is nothing catastrophic about 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 be able to erase that pesky credit card debt.

Let's see how financial impact with a credit card at the rate of 19.9%. The data comes from the calculation tool of the Office de la protection du consommateur.

  1. With a minimum payment of 3% of a balance due of $1000, it took 10 years and 11 months to repay the debt in full. And the interest charges were going to be $979.87.
  2. 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 interest charges will drop to $747.80.

Increasing the required minimum payment on the monthly balance due by only half a percentage point (from 3 3.5%) will reduce the total interest bill by $232 per $1,000 balance owing. And this, by shortening the repayment period of said debt by two years.

And when the minimum monthly payment reaches 5%, or an amount of $50 for every $1,000 of balance due as of August 1, 2025, the number of years to repay this debt will decrease to 6 years and the interest will be $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 repayment period by nearly 5 years of debt and save $538 in interest charges for every $1,000 of debt.

For example purposes, I limited the calculations to a balance owing of only $1,000.

THE MULTIPLIER EFFECT

Depending on your situation, just multiply the previously mentioned numbers by your balance owing to realize what it will cost you in interest charges if you limit your credit card payments to the minimum payment.

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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 will be spread over 6 years, and interest charges would be capped at $2,209.

It's still a poisonous debt! 

Solutions to over-indebtedness < /h3>

  • To curb credit card over-indebtedness, I suggest that governments raise the minimum payment on the balance owing to 10%.
  • Another proposal that seems essential to me. Governments should freeze the amount of interest charges at a maximum rate of 12% on credit cards. This rate is 2.5 times the current prime rate of 4.7%.

The cancer of credit card debt