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If you make minimum payments on your credit card, do you get charged interest?

Posted on 17 April 2022

Written by Jeff Adiken

If you have a sizeable balance on your credit card, the thought of paying off your credit card debt can be a little overwhelming. If you have multiple other debts, it can be tempting to simply get by on the minimum payments instead. But if you make minimum payments on your credit card, do you get charged interest? In most circumstances, making just the minimum payments will make your overall debt more expensive because it will mean you accrue additional interest. This can quickly lead to increasing debt. Although you can make just the minimum payment on your credit card debts, it is not the best solution for tackling credit card debt. Even just paying a little more each month can make a big difference to your overall credit card debt. In this article, we explore the best ways to tackle credit card debt and how to break the minimum payment cycle.

What is a minimum payment on a credit card?

The minimum payment on a credit card refers to the least amount of money you need to pay towards your credit card debt each month to keep your account in a good order. By making the minimum payment on your credit card each month, you avoid facing late fees, and will also dodge an increase in your credit card’s interest rate for the year. You will be able to keep any rewards associated with your credit card, and will also avoid being reported to Canada’s two primary credit bureaus (Equifax and TransUnion) for making late payments. Although you will avoid these consequences, you will accrue expensive interest charges as you continue to carry a balance. Minimum payments on credit cards also mean you are repaying just a small amount of your overall credit card debt. Barely repaying the principal of your debt also means your debt will become much more expensive and cost you over an extended amount of time. You will usually find the minimum payment to pay for your credit card debt on your credit card statement. Note that you will need to pay it by the due date agreed for each monthly billing cycle. Typically, it is a small percentage of your overall credit card debt.

How is a credit card’s minimum payment calculated?

Each credit card lender will calculate their minimum payments slightly differently. This is why it is so important to check exactly what the minimum payment is for your credit card on your statement. Generally speaking, credit cards will set their minimum payment as a small percentage of your overall credit card balance. This is typically 2-3%, or a set fee, whichever amount is more. For instance, a credit card balance of $5,000 would have a minimum payment of $150 if the minimum payment was 3%. Other credit card issuers could issue a flat fee with an addition of any interest accrued from the former month’s billing cycle. Either way, the higher the amount of your credit card debt, the more your minimum payment will be.

If you make minimum payments on your credit card, do you get charged interest?

While making the minimum payments on your credit card will keep you out of trouble with your financial institution, it will not help you to pay off the principal of your debt. It could have the adverse effect, meaning you have several years of payments without reducing your credit card debt in any substantial way because of the interest accrued over time. Even if you can repay just $100 per month on your credit card debt in addition to the minimum payment, it will have an extreme impact in reducing the time taken to repay your overall debt. If you have a credit card debt of $5,000 with a 3% minimum payment, if you pay purely the minimum payment you will pay just under $6,000 in interest alone and it will take you over twenty years to repay your debt. This is more than the original amount of credit card debt. If, however, you pay just a $100 additional payment as well as your minimum payment, you will pay just under $1,500 in interest overall and by contrast it will only take you just over three years to repay. This shows the impact of paying just the minimum payment on your overall interest rate.

How is your credit score affected by making minimum payments?

Provided you make your credit card’s minimum payment on time each month, you will keep your account in good order. Your payment history is a huge contributor to your credit score, so it is critical not to fall behind. It is a way for lenders and financial institutions to assess whether or not they can trust you to repay their funds on time. Credit scores are dependent on a few factors, and credit utilization rate is another of these. This is a metric used by the credit bureaus, and is a measure of the amount of debt you have in comparison with your overall credit limit, or the amount you are allowed to borrow. The more of your credit limit you use up, the higher your credit utilization rate which some lenders may see as a sign that you are a risky borrower. As a general rule, you should have a credit utilization rate of no more than 30% of your credit card’s limit. By making more than the minimum payment, you will be decreasing your credit card debt and lowering your credit utilization rate. This, in turn, can help to benefit your credit score.

How to pay off credit card debt

Before using your credit card, check out our credit card usage tips. In order to focus on making extra payments, there are two key strategies often adopted for debt repayment in Canada. These are the snowball method, and the avalanche method. The snowball method is a debt reduction strategy that encourages you to arrange your debts from smallest to largest in terms of balance. While making the minimum payments on all your debts, you pay off your smallest debt first, no matter what the interest rate. This method works by rewarding you for paying off each of your smaller debts, snowballing towards the larger debts. It is a good option for those attempting to tackle large debts, who may need a little extra motivation. On the other hand, there is the avalanche method. You tackle your debts in order of how high the interest rate is, irrelevant of how large your debt may be. This is because the higher the interest rate, the more expensive the overall debt is. By clearing the most expensive debt first, you can become debt free more quickly. Learn more about how to pay off credit card debt.

If you make minimum payments on your credit card, do you get charged interest? If you are making just the minimum payments on your credit card, book a free consultation with Spergel. Our experienced Licensed Insolvency Trustees can help you to break the debt cycle, and work with you to gain debt relief. We’ll answer any questions you may have about dealing with credit card debt and break the minimum payment debt cycle.

Jeff Adiken

Jeff Adiken is a Certified General Accountant and Chartered Insolvency and Restructuring Professional with over 18 years’ experience as an LIT (Licensed Insolvency Trustee). He also manages all of Spergel's personal insolvency offices and is our resident expert on credit card debt and debt-free living. When his 'manager hat' comes off at the end of the day, Jeff is happiest spending quality time with his family at home.

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