While consumers have never used their credit cards as much, they are also more likely to fall behind on paying their balances. And with the constant increase in the minimum monthly payment required since 2019, the pill is hard to swallow.
The news is not good. According to a survey published by the credit agency Equifax last September, the use of credit cards has skyrocketed.
Average monthly spend per consumer was $2,370 in the second quarter of 2022, up more than 20% from the same period last year.
Worse still, people with low or bad credit scores have seen their credit card balances increase by more than 16% compared to the second quarter of 2021. At the same time, the average credit limit granted for new cards is now of $5,800, a record for the last seven years. In other words: the possibility of going into debt is growing and consumers are following suit.
Already up sharply
In this context, it should come as no surprise that delinquencies continue to climb, with 100,000 more Canadians than last year missing at least one credit payment. It is the delinquency rate for credit cards that has recorded the most marked increase.
However, 30% of consumers have an outstanding balance on their credit cards, according to the Canadian Bankers Association. Of this percentage, many are content to pay the minimum payment each month, a proportion that was estimated at 15 to 20% when changes were made to the Consumer Protection Act.
Coming into force in 2019, these changes aim to prevent consumers from being condemned to eternally pay interest on their credit cards, without ever repaying the capital. The new regulations now provide that the rate of the minimum monthly payment required will increase by 0.5% per year until it reaches 5% in 2025. Note that all cards put into circulation since August 2019 already have a minimum rate of 5% . For cards issued before this date, the minimum payment increased gradually to 3.5% on 1er August 2019.
Pay more, but for less time
Éric Lebel, partner, turnaround and insolvency at Raymond Chabot, notes that these increases are hurting people whose budgets were already tight.
“For example, for a balance of $5,000 on a 19.99% interest card, in 2019 the minimum payment required was $100 per month. In August 2022, it rose to $175 and in 2025 it will be $250,” he illustrates.
A monthly increase of $150 in just a few years, or $1800 per year. And still it is necessary that the credit card is not used more!
On the other hand, it must be remembered that the purpose of this regulation is to help consumers free themselves more quickly from their credit card debt.
In this sense, it is very effective, emphasizes Éric Lebel.
“It took 65 years and one month to pay off a balance of $5,000 with a minimum payment of 2%, which generated $22,415 in interest charges. At the current rate of 3.5%, we go to 16 years and one month and $9,349 in interest. In 2025, it will only take 10 years to pay the total balance, with $7,427 in interest,” he illustrates. Morality: it will hurt, but it will be better afterwards.
Tips
- The Office de la protection du consommateur’s tool allows you to calculate minimum payments on credit cards, the duration of repayment and to compare the results according to the different rates (opc.gouv.qc.ca/paymentminimum).
- Opt for credit cards with interest rates below 19.99%. There are about thirty with rates of less than 13%.
- Do you have a line of credit? If the rate of this one is lower than that of your credit card, you could use it to pay off your card… Provided that this is not an excuse to get into more debt.
- If you are concerned about your financial situation, consult a budget advisor, for example at the ACEF in your region. If nothing is going right, an insolvency trustee is a good option.