Quinn from Calgary is struggling to make even a minimum credit card payment. Read along as our expert, CPA Adeola, explains the consequences of missing or making a partial payment and what to do instead to get her finances under control.
THE QUESTION
Debt Experts,
Quinn L.
To say I’m struggling is an understatement! Even minimum payments are a stretch for me at this point. How much trouble would I be in if pay less than the minimum? What consequences could that mean? Any other suggestions on what to do?
Calgary, AB
THE ANSWER
You have probably heard at some point that credit cards are bad. Are credit cards really the enemy? A good number of people can agree that credit cards have come in handy at critical times.
For example, you really need to take your dog to the veterinarian but, are weeks away from getting paid. Using your credit card to pay for a vet visit saves the day.
However, the important part about credit cards is using them responsibly. This simply means using your credit card for small purchases or emergency needs and paying your balance when due.
Now, let’s be realistic. Sometimes, we face financial stress and have difficulties paying off debt, credit cards inclusive. Here’s what you need to know about how financial institutions treat unpaid credit card balances.
How credit cards work
Credit cards have agreements. Do you remember the boring long-paged document you received in the envelope with your credit card? Yes, that’s the one. You should read it.
The credit card agreement document from your credit card issuer contains a lot of information on the terms of your credit card usage. One of which is the minimum credit card payment. Most banks set this minimum credit card payment at 10 dollars, sometimes at a percentage of your credit card balance.
When you open a bank account, a lot of banks will offer you a credit card with a credit limit. Your credit card limit means you can borrow a limited amount and pay it back within a predetermined cycle. The credit card billing cycle is usually between 21 to 31 days.
Your credit card issuer will send you a credit card account statement at the end of your billing cycle. You can make a balance transfer from your bank account to pay the amount due.
If you do not pay your credit balances, the banks will charge an annual interest rate on your outstanding balance. Credit card interest rates are notoriously high, ranging from 9 percent to 25 percent on credit balances. Even more on cash advances.
The interest rates are usually annual rates. For example, if your credit card’s annual percentage rate is 20 percent, the monthly rate on your credit card balance is around 1.67 percent.
A credit card is a form of revolving credit. When the billing cycle ends, the banks expect you to pay the full balance or the minimum amount. When you fail to make your credit card payments, this will cost you more money in the form of interest payments.
What happens if you don’t pay the minimum credit card amount?
The minimum credit card payment is what you need to pay on your credit balance to maintain your credit card and be in good standing with the bank. Failing to pay your minimum credit card amount will make the bank take credit collection actions. These actions can vary from following up on payments, using credit agencies, or closing your account.
Also, defaulting on your minimum payment at the end of your billing cycle is likely to result in your bank reporting to the credit bureaus.
Defaulting on your credit card minimum payment can also increase your credit utilization ratio. A credit utilization ratio measures how much credit balance you have across all your bank accounts. A high credit utilization will impact your credit rating and drive down your credit score.
Your credit score is a 3-digit number that measures your creditworthiness. Credit scores range from 300 to 900, with 300 being the poorest and 900 being the best. Financial institutions use your credit score to assess whether you can pay back a loan. An average credit score can range from 600 to 700.
Making minimal credit payments can keep you in debt for a long time. High credit card interest accumulates and increases the amount owing to financial institutions.
It is not advisable to ignore your credit card balances. Credit card minimum payments are generally low amounts. It’s helpful to include this amount in your budget to keep your account open and maintain good standing status with your credit card issuer.
Credit card debt repayment tips
Banks determine their lending rates using the Bank of Canada interest rate. The Canadian government has recently increased the policy interest rate to as high as 5 percent to fight high inflation.
The economic situation is taking a toll on a lot of Canadians. High inflation and interest rates are draining the wallets of Canadians more than they have in years!
If you have credit card debt, use the following tips to help you make enough payments to get out of debt.
Prioritize debt repayment
Even when it seems like a difficult decision, rethink other expenses that you can do without. This allows you to have more income that you can use to pay off debt.
Have a budget and debt repayment plan
Sometimes, saying it out loud feels good, but drawing up a debt repayment plan and budget helps get the ball rolling. Having a well-laid-out plan can go a long way. It helps you see how much debt you owe across all your obligations. It also makes it easy to see how much repayment you need to make within a certain period to become debt-free.
Use credit cards responsibly
Avoid taking up more credit and pay off your current balance by the credit due date.
Debt consolidation may help
If nothing else works, you can consider consolidating your debt. Negotiating better repayment terms will make your debt more manageable and ease cash flow.
Ask for help
If you are drowning in debt, do not hesitate to ask capable family and close friends for help. Sometimes parents can help bail their children from debt.
Finally, remember that credit cards are not bad. Using credit cards the wrong way is what drives people into debt. Failing to make the minimum credit card payment can cause you to spiral into long years of debt.
Make a conscious plan to pay off past-due credit balances to avoid bank fees and high-interest charges. Paying a small amount consistently towards your debt is better than not making any payments. Use this debt payment calculator to assess your repayment schedule.
Credit card debt situation is more than you can handle on your own? Consolidated Credit Canada can help. We’ll work to lower your payments and simplify all your payments into one. Find out more by talking to one of our experts!
Thanks for submitting your question!
Consolidated Credit’s executive director, Jeff Schwartz will review it and give his response here, along with any additional tips that our credit counsellors have to offer. If you need immediate assistance, please call us and a credit counsellor will get you the help you need.
Please note: We try to answer all questions within 48 hours. However, not all questions may be answered on the website. If your question is similar to one we’ve already answered, we’ll direct you to the appropriate response via email. If we need more information, we’ll contact you at the email provided.
