If your budget is tight, it can be tempting to only pay your credit card’s minimum payment. Since issuers use various formulas to calculate the minimum payment, it can be difficult to figure out how much you’ll need to pay back immediately, especially if you carry a balance on your card. To help out, we’re giving you an in-depth look into standard minimum payment requirements.
We’ll also run through why you should pay more than the minimum balance whenever possible, as well as how your credit card payments impact your credit score.
A word of advice before we begin: each credit card company can set its own minimum payment rules, so some have higher requirements than others. To ensure that you fully understand how your credit card works, we highly recommend reading its terms and conditions.
Figuring out your minimum credit card payment
Each credit card provider has its own rules, so it can be difficult to calculate your minimum credit card payment will be ahead of time. However, your monthly statement will list your minimum payment and dute date. You can also find this information on the issuer’s online portal.
Quebec legislation
If you live in Quebec, your minimum payment is subject to provincial regulations.
- A credit card issued on or after August 1, 2019, your minimum payment will be at least 5% of your statement balance
- Cards issued before August 1, 2019 will eventually adapt to this regulation, too.
In some of these cases, the minimum balance currently must meet or exceed 3.5% of the monthly bill, but this percentage will increase over time. As of August 1, 2023, your minimum payment must be at least 4% of the bill. On August 1, 2024, that number will increase to 4.5%, then to 5% on August 1, 2025.
Since credit card issuers do not have to follow strict minimum payment regulations while serving customers outside of Quebec, it’s harder for other Canadians to figure out their minimum payments ahead of time. That said, the Government of Canada lays out two ways that companies can assess minimum payment requirements.
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The first and most simple method is requiring customers to pay a flat rate, around $10, as well as to cover any accrued interest and fees. As such, if you carry a balance on your card, your minimum payment will be higher than someone who pays off his card in full each month, since you will also have to pay off the interest.
The second minimum payment calculation method is a bit more involved. Your credit card issuer may require you to pay a certain percentage of your bill each month, while stipulating that the minimum payment must always exceed a certain amount of money, usually around $10. In other words, if you have a credit card that calculates minimum payments at 3%, but requires at least a $10 payment each month, you will owe $10 on a $100 statement and $30 on a $1000 statement.
Since your credit card issuer is at liberty to calculate the minimum payment in a variety of ways, it’s always a good idea to read your card’s terms and conditions. That document will outline how the issuer determines your minimum payment and provide financial clarity to help you better budget your money when cash gets tight.
Advantages to paying more than your monthly minimum
Credit cards can be a major boon in an emergency, allowing you to finance necessary purchases that you simply wouldn’t be able to afford otherwise. But they can also make it tempting to only meet the minimum payment requirements. This can lead you to go into severe debt. It will also lower your credit score, which in turn makes it harder to improve your financial habits. That’s why it is a good idea to pay down as much of your credit card as possible each month. If you do, you will benefit in other ways as well.
Save money in the long run
Even if you ignore the other potential benefits, paying down as much of your credit card as possible is a great idea because it will save you money in the long run. Credit cards are almost always unsecured loans, that is, you didn’t have to offer collateral to receive the card.
The card issuer risks being stuck with your unpaid bill. The lender passes this risk to you in the form of a high annual interest rate. Rates are usually between 15% and 25%. If you have a weak credit score or no credit history, your issuer may charge you an even higher interest rate.
A high interest rate isn’t necessarily a problem if you pay off your credit card balance in full every month. However, it adds up if you only make partial payments. Since interest compounds, you’ll start to receive exponentially larger bills, which become harder and harder to pay off.
Increased credit score
The other major perk to regularly paying down as much of your credit card as possible is increasing your credit score.
Generally speaking, there are a few major ways that a credit card can affect your credit score:
- Your credit card is a credit account. Simply having it provides your credit profile with a bit of a boost.
- If you apply for a credit card, the card issuer does a hard credit check on your credit file. This slightly lowers your score
- Part of your credit score reflects your payment history, such as whether or not you make adequate payments on time
- If you max out your credit card, your score will take a dip.
The first point will always slightly increase your score. Current credit score models only count hard credit checks against you for 1 to 2 years.
Your payment behaviour is important
It's hard to keep your credit utilization ratio low if you only make minimum payments on your credit card balance. A credit utilization ratio compares how much of your total available credit you use. A good ratio is under 30%.
Try to pay down your credit card statement in full each month to keep your credit utilization low. This, in turn, increases your credit score.
On the same note, your payment history makes up a big part of your credit score.Credit bureaus like TransUnion and Equifax see how often you pay your bills and if you’ve ever missed a payment.
You can technically get by with only making minimum monthly payments. Just remember that you are responsible for the interest charged on any outstanding amount.
Build strong financial habits
Paying as much of your credit card bill each month as possible leads to stronger financial habits. If you're paying back as much money as you possibly can, you likely have a thorough knowledge of your finances.
You’ll have to examine your monthly income to know exactly what money is coming in. Plus, it’ll be harder to financially overextend yourself. Why? Knowing you have a short time to come up with the money might stop you from splurging.
Greater financial flexibility
When you eliminate as much high-interest debt as possible, a beautiful thing takes its place: financial flexibility. You can divert money elsewhere. Plus, in case of emergency, it's much easier to access funds by credit card or other loans.
Frequently asked questions about minimum credit card payments
Still a bit confused about how minimum payments work? Don’t worry. We know they can be tough to deal with! If you need some more help, check out our list of frequently asked questions:
Your minimum payment will depend on a few major factors: how your credit card issuer calculates minimum payments, whether or not part of your balance has been carried over from previous months, and your province of residence.
As we mentioned above, there are a few ways that your minimum payment could be calculated. If the balance has not been carried over from a previous month and you do not live in Quebec, you can expect your minimum payment to be either a flat rate, usually around $10, or percentage of your bill, usually around 3%, which in this case would be $150.
If part of the $5,000 has been carried over from a previous month, your credit card provider may include the interest in your minimum payment. For example, if you are carrying a balance of $3,500, accrued $58.33 in interest last month, spent an additional $1441.67 this month, and generally have a $10 flat rate minimum payment, your credit card provider may increase this month’s minimum payment to $68.33 in order to collect the interest.
If you live in Quebec, the above still applies, but your minimum payment must also be at least a certain percentage of your statement. If you opened your credit card on or after August 1, 2019, the minimum payment must be at least 5%. If you opened your credit card before August 1, 2019, the minimum payment must be at least 3.5%, though this number will increase by 0.5% on August 1st of each year until it reaches 5% in 2025.
If you only cover your credit card’s minimum payment, you’ll be subject to lots of interest fees. In most cases, only paying the monthly minimun will cause your interest to build up until it is almost as high as the principal.
From a credit standpoint, making minimum monthly payments is technically okay, though you’d be on a very slippery slope. If you’re careful to pay the minimum amount on-time every month, your payment history will not be negatively affected. However, it could become much more difficult to manage your credit utilization in subsequent months. This can pose a serious threat to your credit score.
If you can’t meet your credit card’s minimum monthly payment, your credit score will take a serious hit. The longer you wait to pay the minimum, the lower it will sink. Generally, you’ll also be charged a missed payment fee. In some cases, your credit card’s interest rate will increase. If you do not pay over a longer period of time, your credit card might even be paused.
That being said, if this is the first time that you haven’t been able to make a minimum payment, or if you’ve been a long-standing customer with a history of responsible financial behaviour, your credit card issuer may be willing to negotiate. After all, the issuer knows that emergencies happen. If you realize that you won’t be able to meet your minimum payment, call the issuer and ask to negotiate. You might even be able to defer payment for a month or two. There’s no guarantee that the issuer will say yes, but it’s worth a try.
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About The Author: Arthur Dubois
Passionate about personal finance and financial technology, Arthur Dubois is a writer and SEO specialist at Hardbacon. Since his arrival in Canada, he’s built his credit score from nothing.
Arthur invests in the stock market but doesn’t pay any fees because he uses National Bank Direct Brokerage online broker and Wealthsimple’s robo-advisor. He pays for his subscriptions online with his KOHO prepaid card, and uses his Tangerine credit card for most of his in-store purchases. When he buys bitcoins, it’s with the BitBuy online platform. Of course it goes without saying that he uses the Hardbacon app so that he can manage all of his finances from one convenient place.
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