Maxed out your credit cards? Max out your payments, too

We all hate getting our credit-card bill weeks after the benefits of retail therapy have worn off.

After you check your statement, you might choose to pay off the balance in full by the due date. You’ll pay no interest, thus you’re using your credit card wisely.

On the other hand, you might only make the minimum payment on your credit card balance. This minimum payment will be only a fraction of what you owe, so it may seem like a painless approach to paying off the debt. But don’t be fooled: by making minimum payments, your debt will endure for years—decades, even—and interest charges can grow to the point of equaling or exceeding the original cost of the purchase.

The cost of minimum payments

Let’s say you have an outstanding balance of $2,000 on a credit card with an 18 per cent interest rate. Your minimum payment is $10 or two per cent of the balance, whichever is greater. Your initial minimum payment would then be $40 (two per cent of $2,000). 

If you make only the minimum monthly payment every month, it will take you 30 years and 10 months to pay off your balance in full and you will end up paying $4,931.11 in interest. That’s more than double the amount originally borrowed.

But if you increase your monthly payment to $100, it will take you two years to pay off the balance in full and you will pay $395.65 in interest.

Read your statement

By law, federally regulated credit card issuers have to show on your credit card statement an estimate of how long it will take you to pay your balance if you make only the minimum payments.

“Paying only the monthly minimum amount on your credit card is not a sustainable financial strategy,” says Lucie Tedesco, commissioner of the Financial Consumer Agency of Canada (FCAC). “Increasing your monthly payment by even a small amount can drastically shorten the length of time it will take you to pay off a credit card balance, as well as reduce your interest charges.”

You can use FCAC’s credit card payment calculator to determine the impact of only paying the minimum payment on your credit card. (-NC)