What you need to know about minimum payments on credit cards

Expert advice for dealing with debt Chartered professional accountant Garth Sheriff joins CP24 for some tips on how to deal with debt.

When it comes to credit cards, the term "minimum payment" is often used as a marketing ploy, promising customers that a seemingly small, manageable monthly payment will keep them in good standing with lenders.

A $25 or $50 monthly minimum payment may not sound like much, especially given the high cost of groceries, fuel, and rent today and compared to all of your other expenses, may sound like just a drop in the bucket.

More often than not, though, “minimum payments” are an illusion designed to entice customers into accruing unmanageable debt. Below, I’ll explain a bit more about how minimum credit card payments work and why they can be problematic.

What is a minimum payment? 

Are you considering using your credit card to cover the cost of an expensive suit or dress to impress your co-workers at the next office party?

Why not?

After all, the credit card company said you just needed to make a “minimum payment” of $50 per month. That’s about what you’d pay for a couple of night's worth of groceries, so what’s the big deal?

Here’s the truth - minimum payments on credit cards simply indicate the smallest amount you can pay by the due date to keep your account in good standing.

Typically, this amount is a small percentage of your total outstanding balance plus any interest accrued.

Assuming that you’re only making your minimum payments, by the time you finish paying off your original $600 debt, the credit card company will have collected an extra $100 to $300 worth of interest payments.

Credit card issuers calculate their minimum payment amounts to appear manageable to cardholders but make no mistake, credit card companies are for-profit businesses and just like gambling at a casino - the house always wins.

The reality of minimum payments

The reality is that making only the minimum payment can significantly extend the repayment period and increase the total interest paid, turning a seemingly small debt into an amount that’s significantly more than you expected.

According to TD Bank, a “low-interest” credit card still has a 19.99 per cent interest rate, which can really add up - especially if you’re paying off the purchase over an extended period.

The psychology behind minimum payments 

The allure behind low minimum payments on a credit card lies in the immediate relief from financial pressure that offers a path of least resistance during tight budgetary months:

There’s an unfortunate stereotype that people who get into credit card debt are just irresponsible consumers, purchasing designer clothing, taking vacations, and eating out more often than they should and just can’t afford it.

In reality, though, many with credit card debt are hard-working individuals and families who are just trying to take care of themselves and their families. The fact that Canadian consumer credit debt reached an all-time high of $2.4 trillion in the second quarter of 2023 is evidence of this.

The dark side of credit cards is that they present their low minimum payments as an upside, often to individuals in a challenged financial situation who have nowhere else to turn.

This option plays into the human tendency to prioritize short-term relief over long-term financial health, making it tempting to choose the minimum payment and defer dealing with the larger debt problem.

Unfortunately, the psychological comfort of avoiding a larger payment today leads to a costlier outcome tomorrow, keeping consumers in a perpetual state of debt.

For example, if you’re only required to make a minimum monthly payment of $50 on a $1,000 credit card balance, only half of that payment may go towards paying down the principal while the remainder just pays interest (profits) to the credit card company.

How to use credit cards the right way 

Before you get the wrong idea, I want to point out that credit cards, by themselves, aren’t the enemy.

When used responsibly and intentionally, credit cards can help you build your credit profile and can help you earn rewards and “free money” in the forms of:

To use credit cards to your advantage, though, you should use them intentionally and pay them off early, and not just make the minimum required payment.

You shouldn’t use credit cards from a position of financial desperation or to spend outside of your budget, as this is the first step to entering the cycle of negative debt.

From time to time, emergencies come up, and you may need to use a credit card. However, these situations should always be accompanied by a plan to pay the credit card’s balance down as quickly as possible after the emergency is taken care of.

Building an emergency savings

Instead of relying on a credit card to help you out of difficult financial predicaments, I suggest taking a more proactive approach by creating an emergency savings account to cover unexpected expenses when they arise.

Use your credit card as a tool to intentionally build your credit and earn rewards.

For example, use your credit card to pay for gas or groceries for the month and pay the total balance off before your payment due date. This will prevent interest from accruing and will allow you to take advantage of the card’s rewards without risk on your end.

Use your emergency savings to cover all other unexpected expenses, such as emergency home repairs, veterinary bills, mechanic bills, etc. To ensure that your emergency fund is always full, I recommend diverting a set percentage of each pay cheque aside for it.

Are you in more debt than you can handle? Keep on reading to see my best tips on how to get out of debt as quickly as possible!