The cancer of credit card debt

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

In its latest report on credit market trends, Equifax Canada reports a sharp increase in average monthly credit card spend, which rose 17.5% in Canada in the first quarter of last year compared to the corresponding quarter of 2021. In Quebec, the increase is even greater, at 18.4%.

Another key indicator: the volume of new cards issued by credit card issuers increased by 31.2% in the first quarter.

And the average credit limit granted to new cardholders has now reached $5,500, the highest in seven years, according to Equifax Canada.

THE $83 billion question

Last April, Statistics Canada estimated the debt held by Canadian households through credit cards at $83 billion. $9 billion more than April 2021.

If you’re one of the 35-40% of credit card holders who can’t afford to pay off their balances in full each month, be aware that credit card debt is likely to get you in the ditch.

Like a cancerous growth, the credit card destroys the health of your personal finances.

FIRST…

If you don’t pay the monthly balance in full, know that you’ll never benefit from the 21-day interest-free grace period credit card issuers are required to provide.

Once the balance is not paid in full by the due date, interest charges on new purchases will start accruing from the end date of the previous period.

explanation.

For example, consider a bank statement with a current balance of $1,000 covering the period from June 7th to July 4th with a due date of July 25th. If you do not pay the full balance of $1,000 by the due date, interest will accrue on new purchases made during that period (June 7 through July 4) from the time the transaction is recorded. Therefore, if the transaction dates back to June 7th, the interest on that purchase will start from that moment. Etc…


INCREASE OF MINIMUM PAYMENT

From 1ah This coming August, the minimum payment for credit cards issued before August 2019 will increase from 3% of the balance due to 3.5%. Thereafter, the minimum remuneration increases annually by half a percentage point to 4% on January 1ah August 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.

Specifically, the increase in the minimum payment represents a financial burden.

Currently, the minimum monthly payment is 3% of the balance owed. Minimum payment is $30 per $1,000. At 3.5%, the minimum payment increases to $35.

There’s nothing catastrophic about that, we agree!

But the “bright” side of the enforced minimum payment increase is its critical impact on the number of years it takes to finally pay off that pesky credit card debt.

Let’s see the financial impact with a 19.9% ​​credit card. The data comes from the calculation tool of the consumer protection agency.

  1. With a minimum 3% payment of a $1,000 balance owed, it took 10 years and 11 months to fully pay off the debt. And the interest cost would be $979.87.
  2. The new minimum payment of 3.5% of a $1,000 balance owed reduces the number of years to repay to 8 years and 11 months. And the interest cost will drop to $747.80.

An increase in 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. And this by shortening the repayment period of this debt by two years.

And when the minimum monthly payment reaches 5% i.e. H. an amount of $50 for every $1,000 of balance due as of January 1ah August 2025, the number of years to repay this debt will drop to 6 years and the interest cost will be $441.87.

Compared to the current 3% minimum monthly payment, increasing the minimum payment to 5% will have the tangible financial effect of reducing the debt repayment period by almost 5 years and saving $538 in mortgage interest per $1,000 of debt.

For example, I limited the calculations to a balance owed of only $1000.

THE MULTIPLIER EFFECT

Depending on your situation, all you have to do is multiply the numbers above by your balance to see what it costs you in interest costs if you limit your credit card repayments to the minimum payment.

Therefore, starting next August, a $5,000 balance owed will require a minimum monthly payment of 3.5% ($175/month). It will cost you the tidy sum of $3739 in interest costs at the end of paying off that debt (8 years and 11 months).

With a minimum monthly payment of 5% ($250/month), the repayment would be over 6 years and the interest cost would be capped at $2,209.

It remains a poisonous guilt!

Solutions against over-indebtedness

  • To curb credit card debt, I propose that governments Minimum payment on balance 10%.
  • Another suggestion that seems essential to me. Governments should freeze the crowd Interest of a maximum of 12% on credit cards. This rate is equivalent to 2.5 times the current policy rate of 4.7%.

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