July 11, 2024
The minimum payment on a credit card is what you’re required to pay at the end of each billing cycle. We look at how this number is calculated and the advantages of paying more.
Minimum payments are a key aspect of credit cards. We all know that credit cards have minimum payments, and they’re a key aspect of the repayment process, but do you understand how your minimum payment is calculated?
Understanding the intricacies of your credit card's minimum payment is not only essential for effective financial management, but also pivotal in avoiding potential debt traps.
Credit cards have minimum payments for a simple reason: credit card companies want to ensure that cardholders make regular payments towards their outstanding balances.
The minimum payment represents the smallest amount that a cardholder is required to pay on their card balance each month.
Minimum payments help cardholders manage their debts by allowing them to make smaller payments if they are unable to pay the full balance at once.
There is a huge drawback to only paying the minimum amount. It means paying more in interest and extending the amount of time it will take to fully repay the debt. The added interest payments mean paying more overall than simply paying off the full amount at once.
In most of Canada (with the exception of Quebec), card issuers will calculate your minimum payment as a percentage of your total balance, typically between 2% and 3%, or a minimum of $10, whichever amount is higher.
If you have a $2,000 balance and your credit card charges you 3% of that, then your minimum payment would be $60, plus any interest and accrued fees.
The government of Canada has a helpful tool you can use to calculate your monthly minimum payment based on your specific credit cards.
Each time you receive your credit card bill, the credit card company must provide an estimation of how long it will take you to pay off the full balance if you choose to only pay the current minimum amount.
Each credit card company will set a different percentage for the minimum amount depending on a variety of factors, including the kind of account you have with them, their own company policy, and various financial regulations.
That’s why it’s important to understand your credit card agreement before signing up for a new card.
On August 1, 2025, Quebec will require all residents to pay at least 5% of their credit card balance as the minimum payment.
This change completes a process the provincial government started in 2019.
Since then, anyone who signed a credit card contract on or after August 1, 2019, has already been paying a 5% minimum. For contracts signed before that date, the government has steadily increased the minimum payment by 0.5% each August.
Every credit card holder in Quebec must follow the 5% minimum payment rule starting August 1, 2025.
So, a $2,000 balance with a credit card that charges 5% on that balance means a minimum payment of $100, that’s $40 more than our example above.
With this new rule, the Quebec government wants to promote responsible borrowing and help consumers manage their debt. By increasing the minimum payment percentage, the government aims to encourage credit card holders to pay off their balances more quickly and reduce the overall cost of borrowing.
The minimum payment is the absolute lowest amount you are required to pay each month, but you can always pay more and there are real advantages to doing so.
It can take years to pay off your credit card debt if you only pay the minimum each month. Think of that $2,000 example we looked at with a monthly payment of $60. It would take over two and a half years to remove that debt by paying $60 a month, and that doesn’t include any interest fees. For anyone who maxes out a credit card, this can be a real issue.
If you pay your credit card bill in full each month, you can remove all your debt in a timely manner.
Paying more than the minimum on a credit card saves you money by reducing the interest you have to pay.
The minimum payment often only covers a small portion of the overall balance, so making higher payments can make a big difference in reducing your debt. You’ll also lower your interest costs in the future by paying more than the minimum each month.
Depending on your balance, this can mean saving hundreds or even thousands of dollars in the long term.
Paying more than the minimum reduces your credit utilization ratio, which is the amount of credit you're using compared to your total credit limit. You want to utilize no more than 30% of your overall credit limit at the most.
Lowering this ratio shows that you're using credit responsibly, which positively impacts your score.
Lenders and credit bureaus view consistent and timely payments as a positive indicator of creditworthiness. By consistently paying more than the minimum, you show lenders that you are actively working towards reducing your debt.
Paying more than the minimum on your credit card balance can save you money and help you get out of debt faster. Here are some practical strategies to make it happen:
Start by creating a monthly budget that prioritizes paying off your credit card debt. Identify areas where you can cut back, such as dining out or subscription services, and direct those savings toward your credit card payments.
Start by listing all your income sources and expenses, including fixed costs like rent, utilities, and groceries. Identify areas where you can cut back, such as dining out or subscription services, and redirect that money toward your credit card payments.
A well-crafted budget ensures you prioritize debt repayment without neglecting essential expenses.
The avalanche method is a smart strategy for paying down credit card debt efficiently and saving money on interest. Focus on the card with the highest interest rate first, while continuing to make minimum payments on your other cards.
Start by listing all your credit cards, including their balances and interest rates. Prioritize the one with the highest interest rate. Each month, allocate as much extra money as possible to that card while covering the minimum payments on the rest.
Once the highest-interest card balance is fully paid off, redirect the amount you were paying toward the next highest-interest card. Continue this process until all your debts are cleared.
It’s a good idea to set up automatic transfers to help ensure you always pay at the least the minimum. Doing this ensures you never miss a payment deadline, avoiding late fees and potential credit score damage.
Setting up automatic payments also helps you establish a consistent habit of paying down your debt. You can set higher payments to cover more than the minimum amount, which reduces your balance faster and saves you money on interest.
By taking this "set-it-and-forget-it" approach, you can reduce stress and focus on other financial priorities.
If you’re struggling to afford your credit card’s minimum payments, we can help. Our team of Licensed Insolvency Trustees can evaluate your situation and help you find a way to become debt-free. They can work to lower your payments to what you can afford and to reduce your overall debt load. There is no obligation to a first consultation and it’s always free.
July 11, 2024
The minimum payment on a credit card is what you’re required to pay at the end of each billing cycle. We look at how this number is calculated and the advantages of paying more.
