Title: The Unintended Gift of Business Debt: How Credit Card Minimum Payments Can Lead to Financial Traps

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Exploring the Reality Behind Scott Hannah’s Credit Card Minimum Payment Advice

personal finance
columnists
Business

Debt is the gift that keeps being given in the wrong way.

Photo by BRENDAN SMIALOWSKI /BLOOMBERG NEWS

Q: My boyfriend and I were doing fine getting our credit card debt under control. I had just finished school and my friend had a lot of construction work. Any extra money we had went towards paying for our cards. But he was injured shortly after our daughter was born, and since we both had reduced incomes, we basically undid any progress we had made. Luckily we had our credit cards to fall back on, but little did we know that while we could keep up with the minimum payments, we wouldn’t really last long. We thought we were doing the right thing by making the minimum payments every month. Are we missing something? ~ faith

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A: Credit cards have their place, but without fully understanding how they work and how we can use them to our advantage, the lifeline they offer in difficult circumstances can quickly become a trap. Once we have a balance on our credit cards that we take with us from month to month, we quickly learn how debt can be a gift, given to us over and over again in the worst possible way. However, regaining control is possible.

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To turn the tables on the credit card traps, here’s what you need to know:

Minimum payments may not be what they seem

Minimum payments are the smallest payment amounts that you are allowed to make on your credit card each month while complying with your cardholder agreement. This ensures a positive reference to the payment history in your credit report. However, minimum deposits are not designed to pay out a credit card. An ongoing, revolving balance that never decreases by any appreciable amount will ultimately hurt your credit rating, which is meant to reflect not only your payment history, but how you’re likely to handle future obligations.

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How are credit scores calculated in Canada?

Minimum payments can be a lot higher than you might think

Your minimum payment requirement is higher the more you owe on your credit card. Two percent of $3,000 is $60, but if you owe $6,000, that amount doubles to $120. That’s the part that’s easy to remember. However, many lenders have revised their cardholder contracts in recent years to include interest in minimum payments. While this makes a minimum payment almost a fixed payment, it can make it harder to meet minimum payments overall.

How to Avoid These Four Myths About Credit Card Minimum Payments

There are actually a number of ways your minimum payment can be higher than you think. Let’s take the example of $3,000 owed on a credit card with an annual percentage rate (APR) of 19.99 percent and a two percent minimum payment ($60). This base amount would only be your minimum payment for the first month that you transfer the debt (i.e. you owed nothing or paid your bill in full two months ago).

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One way the minimum payment can be higher than you think is that some lenders charge interest and fees on top of the minimum payment you are required to make. In our example, this would add almost $50 in addition to the $60 you already have to pay. If you have exceeded the limit or have additional amounts past due, these amounts will also be added to your minimum payment requirement.

Escaping the Credit Card Trap – FAQ

Your minimum payment requirement sometimes increases if you miss two minimum payments in a 12-month period. Most credit card issuers now impose this penalty on customers who fail to make their full minimum payments as required. The penalty may apply for a specific period of time, e.g. B. a year, or it can be a permanent change to your account.

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Skipping a credit card payment could leave you stranded and in more debt

An additional consideration is that some credit card issuers now compound interest on a monthly basis, rather than annually or semi-annually as they have done in the past. Compound interest means that any interest left over from the previous accounting period is added to the next month’s balance owed. This means that a cardholder ends up paying interest for interest. The amount of interest charged to you in a billing cycle is shown on your bank statement. You can avoid this compound interest problem by increasing the amount you put on your credit card each month.

12 tips to use a credit card and avoid getting into debt

If you have available balance, it can be tempting to withdraw cash from your credit card to cover any shortfalls in your bank account. This is a cash advance that, while convenient, comes with higher interest rates and no grace period. Interest begins on the day you receive the cash.

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Credit card companies can also decide the order in which your payments are processed. While different types of transactions, e.g. B. Purchases may carry interest at different rates versus cash advances, lenders are not required to apply your payments to the most expensive transactions first. Check your cardholder agreement to see the order in which your payments will be applied when using your credit cards for non-traditional purchases.

The solution to minimum payment problems

The best tip I can give you for getting your credit card debt under control is to make fixed payments instead of minimal ones. Outline your budget to find out how much you can afford to keep paying. Then you make that payment every month. Use this credit card payment calculator to see how much money and time you’ll save, which will free you up to work on your other goals faster.

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The quintessence of minimum payments by credit card

Credit card debt is at an all-time high in Canada, and no matter how you break it down, it takes up a large chunk of many consumers’ budgets each month. But the card itself is just a shiny piece of plastic. If it’s left you in a bind and you’re feeling stuck with more debt than you can afford to pay off, sooner or later you’ll turn to a nonprofit credit counselor in your area. A plan and some practical help will put you back in control of your paychecks.

Related reading:

Is a balance transfer worth it?

Are you missing out if you don’t have a credit card?

Common credit problems and how to fix them

Scott Hannah is President of the Credit Counseling Society, a non-profit organization. For more information on managing your money or debt, contact Scott by E-mailcheck over nomoredebts.org or call 1-888-527-8999.

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Source: theprovince.com

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