August 2009

And how long do you think it will take to pay off that credit card?

Well, well, fancy that… Unpaid credit card bills are increasing in Canada. Did someone say "bubble?"

Want a wake-up call? Have a quick look at the table below.

Time required to reimburse a $10,000 balance on a typical credit card
If you pay back It will take you And, in interest,
you’ll have paid
$350 a month 3 years and 3 months $3,416
$300 a month 4 years and 0 months $4,329
The required minimum 23 years and 11 months $10,948
Regular card with an interest rate of 19% and a required minimum of 3%

Nearly a quarter of a century to pay off your credit card? That’s right, because the required minimum is usually a percentage of the balance: the amount to be reimbursed goes down every month, but the reimbursement period gets longer. Looking at it this way, even a small balance of $1,000 could take 10 years to reimburse. In theory, it could take forever to pay back this credit card!

As a result of the recession, a growing number of cardholders are becoming aware of this reality. And issuing companies are realizing just how fragile their assets could become if, suddenly, an increasing number of customers couldn’t make the required minimum payment.

And that’s exactly what seems to be happening.

More defaults

The Equifax consumer credit agency recently reported that, between June 2008 and June 2009, defaults on payments for credit accounts jumped 24%. Defaults on credit card payments are the second biggest cause of this troublesome situation, the first being defaults on “buy now, pay in six months” type loans.

In the U.S., the epicentre of the economic crisis, it is estimated that credit card companies could record losses of some $395 billion over the next five years. That’s huge! Just for the record, at the beginning of 2009, the U.S. government’s initial bank bailout plan amounted to $700 billion.  

Credit card debt explodes
In the U.S., credit card debt has grown four times faster in the past two years than it has the beginning of the decade.
Source: MSNBC

 Tangible effects

Will this be the “next bubble to burst,” as many contend? Regardless, there are already concrete effects.  For example …

  • Have you noticed that you’re receiving fewer calls or less mail offering you new credit cards at attractive rates?  Obviously, for card companies, this is no longer the time to expand at all cost. 
  • In the same way, issuers are less prone to offer their customers an increase on their credit limit – in fact, it’s just the contrary.
  • And finally, it’s not surprising that interest rates on credit cards are rising, despite the central bank rate, which is still at its lowest.

Lessons to be learned

For the average consumer, this difficult period is a wake-up call as to just how much credit cards can be a fantastic payment tool but, if used improperly, also a frighteningly dangerous credit tool. Here is some very useful advice in this regard. 

  • Pay your entire balance every month. Always! Besides helping you avoid costly credit fees, it will keep your credit file in good order – because bad debtors never have good ratings.
  • Preferably, use your line of credit. Interest rates of credit lines are generally much lower.
  • Don’t count on the “grace period” during which there is no interest on you purchases. If you have an unpaid balance, even a small one, interest is immediately tacked on to your purchases (note that this may change shortly).
  • Use store credit cards cautiously. Their interest rates are often higher than those of universal cards.
  • And, above all, never be content with making just the required minimum payment every month.  

Is help on the way?

In Canada, in July, Finance Minister Flaherty proposed new legislations that would further regulate many aspects of the credit card industry , including information disclosure. As well, card companies will no longer be allowed to deny “grace periods” when the previous balance is not paid. In the U.S., the Obama administration is also pushing for regulations and discussing with industry representatives. 

But the best solution is still the one we all know: never confuse a credit card with a long-term loan … and especially not with a 25-year mortgage!

And so, how long will it take you?

Want to know how long it will take you to pay off your credit cards? Log on to the Financial Consumer Agency of Canada Web site at