Why Paying The Minimum On Credit Cards Is A Trap

• Most of your minimum payment is likely going to interest, meaning you are not really chipping away at the balance.
• It drags out re-payment. It could take you over 9 years to pay off a $5,000 balance if you stop using it and only pay the minimum.
• If you keep putting new purchases on the card while making only minimum payments, the balance will sneakily grow.
• It allows the creditor to make the most money off of you, as they can charge more interest if you barely pay any of the balance. If you only pay the minimum, by the time you've paid off the credit card, you've probably paid more than double the original balance.
• It gives you a false sense of security that you’re keeping up with your debts, even though you may be in over your head if you can’t afford to pay more than the minimum.

Minimum payments are designed to benefit the lender, not you. As long as you pay the minimum, your account isn’t considered delinquent, and you may feel you can rest easy knowing that you’re keeping up with your bills. But you remain trapped in the cycle of interest payments that ensures the creditor will keep earning more. Meanwhile, you may be ignoring the fact that you have gotten to a point of unsustainable debt.

• Obviously, you will need to pay more than the minimum that's set out on your statement. Even $50 or $100 extra a month can drastically shorten repayment time, as the extra amount will all go toward reducing the balance.
• Stop using the card for new purchases. The only way to chip away at the balance is to pay more of the balance than you've added to it. And the portion of your payment that is going to interest doesn't count.
• Commit to a plan of paying off one card at a time. Focusing on the highest-interest balance first will grind away at your overall debt balance quickest, but some people find paying off the smallest balance first provides them with a win that keeps them motivated. Note: be careful about closing paid-off accounts. This can actually reduce your credit score. It may be best to keep the card and use it very sparingly (paying it off in full each month) to have the best impact on your credit score.
• Consider ways to reduce your interest rate. A consolidation loan or a low-introductory-rate card can replace expensive credit card debt. However, proceed with caution: you must be very careful not to use the old card anymore, or you will end up with even more debt. And if you default or take too long to pay off the new debt, the rate can suddenly increase substantially.
• Explore formal debt relief solutions if balances are unmanageable. A Consumer Proposal, for example, may allow you to settle the debt for less than what you owe.

Credit cards are very convenient, and can be very useful for building credit history to improve your score if used carefully. However, they can also make it really easy to get into debt trouble (that's why they impact your credit score so much - lenders know they are difficult to use responsibly, so you get a lot of points if you're able to do so). Paying only the minimum balance does not indicate that you are in control of your credit card debt. It is a sign you may be in over your head.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the Alberta region. We regularly help individuals consider their options when they are dealing with overwhelming debt, including credit card debt. If you'd like to explore options for your debt, please reach out to us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.