Folks, pay more than the credit card minimum

Setting a short deadline to pay off your credit card debt is short-term pain for long-term gain

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This week, new research from TransUnion found that Canadian consumers who make more than the minimum payments monthly on their credit card debt are also more likely to make higher payments on other types of credit as well. The research, which looked at consumers in Canada, Hong Kong and the United States, showed that the more consumers pay over their minimum payment due for credit cards or other revolving lines of credit, the less likely they are to be delinquent on their debt.

The news was especially good for Canadians. According to the survey of 1,100 Canadian consumers, 88% indicated that they more often pay a greater amount than their minimum due on revolving debts each month. “Our findings are good news for Canadian consumers,” said Todd Skinner, president of TransUnion. “Even if consumers can’t pay the full balance, they may now find that lenders view them more positively depending on the amount they pay.

But there was troubling news as well. About 40%, or 4 in 10 Canadians, were uncertain about the importance or benefits of paying off more than the minimum due. So to clarify, in dollars and cents, just how important it is to your overall financial picture to pay off your debt quickly, we’ve run some numbers.

Let’s say you had $50,000 in credit card debt at 11% and made the minimum payment every month. The minimum payments would start at $956 monthly and then be a few dollars lower each month. Using this strategy, it would take you a whopping 40 years to pay off the debt, and total interest paid over that time would be $45,402.

Now, let’s assume instead that you set yourself a deadline of three years to pay off the debt and made much higher payments monthly—$1,650 for three years. Let’s also assume you didn’t take on any more debt during that time. Of course,  your budget could be tight for several months but at the end of three years you’d be free of personal debt and your total interest bill during that time would be just $8,845.78—a large amount for sure, but $36,557 less than had you paid only the minimum over 40 years.

Of course, once your credit card is paid off after three years, you can start a savings and investment program in Year 4, redirecting some—or all—of the $1,650 you were paying on your credit card and put it into a TFSA or RRSP instead, growing your money over the years without much trouble.

The lesson? While paying a little more than the minimum every month is good for your credit record (and will allow you to take on more debt at a favourable rate if you chose too), the best strategy for long term wealth building is to pay off your personal debt as quickly as possible—and then start a diligent savings and investing plan. Your future self will thank you.


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