The Minimum Payment Trap

Caitlin
Author:
Caitlin
Caitlin Wood, BA
Editor-in-Chief at Loans Canada
Caitlin Wood has more than a decade of experience helping Canadian consumers learn how to take control of their finances. Expertise:
  • Personal finance
  • Consumer borrowing
  • Credit improvement
  • Debt management
📅
Updated On: November 13, 2024
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British Columbia Residents: iCash offers payday loans in British Columbia (license number: 67639)

Ontario Residents: Loan amounts and repayment terms are subject to qualification requirements. The maximum allowable cost of borrowing under the payday loan agreement is $14 for every $100 advanced. On a $500 loan of 14 days, the total cost of borrowing is $70, with a total payback amount of $570 and an APR of 365%. On a loan of 62 days, the APR is 82.42%.

Manitoba Residents: To learn more about your rights as a payday loan borrower, contact the Consumer Protection Office at 1-204-945-3800 or 1-800-782-0067 or at www.manitoba.ca/cca/cpo

Nova Scotia Residents: Payday loans are High Cost Loans. The maximum allowable cost of borrowing under the payday loan agreement is 14$ per every 100$ received, which means on a 100$ loan for 14 days, the total cost of borrowing is 14$, with total payback amount of 114$ and an APR of 365.00%.

PEI Residents: Loan amounts and repayment terms are subject to qualification requirements. The maximum allowable cost of borrowing under the payday loan agreement is $14 for every $100 advanced. On a $300 loan of 14 days, the total cost of borrowing is $42, with a total payback amount of $342 and an APR of 365.00%. On a loan of 62 days, the APR is 82.42%.

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Having a healthy financial future is usually a top priority for the average person. Being able to get more credit, being approved for a loan or being approved for a mortgage are three extremely important financial goals, ones that require some work to achieve. More often than not a credit card is the first stepping stone towards building a better financial future. A credit card will allow you, from a young age, to build your credit history and credit score, therefore setting up the foundation for your future financial needs. If used properly and responsibly a credit card is a great financial tool, but if used irresponsibly you could damage your credit for years to come. Getting stuck in the minimum payment trap is one of the worst ways you can damage your credit and your finances in general, here’s what happens when you get stuck.

What Is The Minimum Payment Trap?

When you use a credit card you are borrowing money that isn’t yours, you are then meant to pay it back in a timely manner. But because credit card companies are businesses and they need to make money, instead of paying off your balance in full you can make something called a minimum payment. If you choose to only make your minimum payment you will then be charged interest on the remainder of your balance, this is how a credit card company makes money.

The minimum payment option is there for a reason and can be a useful tool if treated properly. But if misused the minimum payment can turn into a trap that is almost impossible to get out of. Once you start only making the minimum payment on your credit card each month the amount of interest you’re charged will accumulate quickly and your debt will start to grow before your eyes.

What Are The Consequences?

Getting stuck in the minimum payment trap will affect almost all aspects of your financial life and can even start to affect your personal life. It’s important to understand how choosing to only make the minimum payment required on your credit card bill will affect your finances now and in the future. Below are some of the consequences you can expect to deal with.

Lower Credit Card Score

A large percentage of your credit score (30%) is made up of how much debt you have. This means if you have a large amount of debt that isn’t being paid off, your credit score will without a doubt be negatively affected. Your credit score is your financial life line; it shows future lender whether or not they can trust you with their money. A low credit score will prevent you from getting a loan or new credit in the future.

Your Bill Will Become Too Much to Handle

When you see the minimum payment option on your credit card bill each month it can be so tempting to simply pay that, much smaller, amount. The problem is once you start to only make the minimum payment required each month it can become very hard to stop. The interest will start to accumulate and your bill will more likely than not become too much to handle and you might get stuck in the minimum payment trap for years.

It Will Take Years to Get Out of Debt

Most credit cards will provide a chart that clearly illustrates how long it will take you to fully pay off the balance of your credit card should you continue to only make the minimum payments. If your credit card balance is in the thousands it could take upwards of four years to get out of debt. Next time you look at your credit card bill look to see how long it would take you to become debt free if you only made minimum payments, we guarantee you’ll be shocked.

How to Avoid The Minimum Payment Trap

Unfortunately we don’t have any cleaver tricks to help you avoid the minimum payment trap; you simple have to pay off your credit card bill in full every month. You can however figure out ways to reduce your spending so that when your credit card bill comes every month you aren’t shocked by the balance.

The best thing you can do is to use your credit card to buy things that you would normally buy and actually have the cash in your bank account to pay for. Live within your means and should be able to avoid the minimum payment trap.

Caitlin Wood, BA avatar on Loans Canada
Caitlin Wood, BA

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over ten years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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