As of this Monday, the minimum payable on credit cards in Quebec increases to 3.5% of the balance. It has been 3% for a year and will increase by half a percentage point per year, until it reaches 5% in 2025. In the current context, this increase could have significant consequences, and may -be for some people who do not feel concerned at all.
Posted at 6:00 a.m.
It was Quebec that adopted this measure in 2017, which has been in effect since 1er August 2019. Its goal: to prevent indebtedness. New credit card contracts already require a minimum payment of 5% in Quebec.
Although she believes this is a good measure and the goal is relevant, Julie Brissette, budget advisor at the Association cooperative d’économie familial (ACEF) de l’Est, says that it could have adverse effects in the current circumstances.
The fact of increasing, at the moment, with all the costs also increasing, that could be the straw that breaks the camel’s back for some people.
Julie Brissette, budget advisor at ACEF de l’Est
For example, explains the budget counselor, a couple with a balance of $30,000 on their credit cards now has to pay $150 more per month just by meeting the minimum payment. Let’s imagine that this couple has a variable rate on their mortgage, let’s add inflation to that. It can make all the difference, warns Julie Brissette.
The increase may therefore be difficult to absorb for people who already have problems with the management of their card. “It could lead to an increase in people who come to consult us or who go to consult a trustee,” said the ACEF de l’Est counselor.
Small increase, big difference
The context is certainly problematic, also believes Sophie Désautel, licensed insolvency trustee at Raymond Chabot, a subsidiary of Raymond Chabot Grant Thornton.
“For people who have sufficient income, it will be fine, they will be able to absorb it,” she says. On the other hand, with inflation of 8.1% in June, some people with average incomes could be caught, estimates Sophie Désautel.
We must be careful and not think that it is only 0.5%. It will continue to increase.
Sophie Désautel, Licensed Insolvency Trustee at Raymond Chabot
Mme Désautel believes that all this often worrying economic news should push people to make a realistic analysis of their finances and to reassess their expenses, especially those who have never done so.
“You have to make choices between needs and wants,” she says.
And above all, be aware that paying only the minimum payment on the credit card ends up being very expensive.
“You have to estimate the average cost of vacations if you put them on the credit card and pay for them for 48 months,” says this specialist.
To do this, several very simple tools are available online and allow you to calculate the interest on a credit card balance, according to the monthly sums paid if the balance is not paid in full when due.
Lack of education
There is a great lack of education and several myths around the use of the credit card, estimates for her part the budget planner Julie Brissette.
People think that by paying the minimum balance, they keep good credit. But they don’t realize all that they are paying in interest.
Julie Brissette, budget planner
Average monthly credit card spending by Quebecers increased by 18.5% in the first quarter of 2022 compared to the same period last year, according to a report by the firm Equifax, which also calculates that the number of new cards is growing.
“What our data shows us is that credit card spending has been abnormally high,” said Rebecca Oakes, vice president, advanced analytics, Equifax Canada. This is partly due to the resumption of activities such as travel, she explains.
“However, we have a situation where inflation is currently very high. This could mean that a portion of credit card purchases are spent on essential purchases, like groceries or gas, because consumers don’t arrive any other way. This behavior is very concerning,” says Ms.me Oakes.
From 3% to 3.5%, what does it change?
On a balance of $3,000 (interest rate of 19.9%), someone who only makes the minimum payment at 3% takes 17 years and 8 months to fully pay off their balance and pays $3,452 in interest. At 3.5%, it’s more like $2,549 that will be paid out in interest, by paying only the minimum each month. And at 5%, the interest charges paid drop to $1435, under the same conditions.
Stephanie Berube, The Press