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27 Years to Pay off That Credit Card

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Hurray! Two of the credit card regulation changes are now here and on your statement.

Two months ago, we talked about some of the U.S. credit card regulations coming to Canada. They were effective last month, so you will see them on this months’ credit card bill.

The first one is called a minimum payment notice. On your statement you’ll see a box showing how long it will take you to pay off your balance at minimum payments. I had one faxed to me with a balance of $14,500. But are you ready for this: At minimum payments, it’ll take 27 years and a month to pay it off.

Yes, after the shock of that has worn off, you can react one of two ways:

One way is for you to get so mad when see that box, that you’ll do whatever it takes to pay as much as you can, AND to stop using the card for 90% of the daily crap that runs up your balance the quickest.

That’s the consumable stuff that has no business being financed, such as groceries, gas, restaurant meals, Tim Horton, cigarettes, or a trip to the liquor store. All of those are consumed long before you even get the credit card bill. But they’re all financed now, running up interest, and being owed for years and years. That’s insane. If you just switched those to a debit card, your credit card balance will drop a lot, AND you’ll be paying for things as you’re using them.

The second reaction can be that, well, I never pay the minimum payments. That may be true, but aren’t you also still using your card and increasing the balance? If today’s 27 years seems like a lot, odds are, it’ll increase as your balance goes up.

Paying extra is great, but how much extra do you pay to actually get some traction? This minimum payment warning chart has always been in the back of my: It’s Your Money book. And look at the chart with it. If you keep your payment the same as this month, and add just $20 a month, the 27 years becomes less than four years to pay off the balance. THAT is worth knowing, and worth doing.

The second part of the legislation is that card issuers can no longer just keep increasing your credit limit. That’s a blessing, because this person’s statement I have in front of me is for a $23,000 limit, but that’s more than this person earns in a year! There is a big note at the bottom of the statement now that says: Congratulations! You qualify for a limit increase. To accept this offer, please visit our branch or contact the Call Centre.

Don’t do it. The last thing anyone needs is another limit increase, another temptation to spend more. You know they’re going to contact you, if you don’t get to them. Because the card issuer really really wants you to owe as much as possible to make sure you can only make minimum payments. Why? Because then you really will have to take that 27 years to pay the balance. And that’s how lenders maximize their profits. What? You thought any of them were in business to help you? Get real and wake up.

The Downside of Low Interest Rates

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Boy, did we Canadians go on a debt binge last year. Our total consumer debt, excluding mortgages, reached $1.4 trillion at the end of 2009. We are now officially the most overextended country of the big 20 developed nations. For all the pain we see from US families, we now owe more than Americans, on a per capita basis, and even more than the average Greek family! Right now, we are in debt $1.44 for every dollar of income. If there were to be a setback in the economy again, we’d be in big trouble.

Or, as we talked about a month or so ago, when rates keep climbing, we’re in the same trouble. Don’t forget, consumer debt, other than probably our fixed-rate car loans, most everything else from lines of credit to credit cards are on variable rates. That means, rates go up, you’re paying that increase the following month.

Yesterday, the Bank of Canada raised interest rates another quarter of a percent for the second time. On each $100,000 of debt that is not on a fixed rate, these two rate increases will cost you $500 a year and rising.

Behind the scenes, the federal government is taking steps to clamp down on our debt loads. A few months ago, the Federal Finance Minister announced changes to the down payments for mortgages, and the total that can be refinanced on a home.

The next wave of pressure, and nobody has talked about this, yet, is your credit cards. Starting in a few months, your minimum payment will be going up. The good news: you’ll have it paid off faster. The bad news: It’ll hit your budget to pay more as a minimum payment.

Starting with MBNA, the largest issuer of MasterCards in Canada, August will see a new and higher minimum payment. They will be the first, but not the only ones, to change the way the payment is calculated.

Why? Remember that I always say what happens in the US will come here? Well, their new credit card regulations require a box on your statement to show how long it would take to pay off the balance when making minimum payments. That will happen in Canada this fall, too. So when they increase your payment, the staggering time it’ll take to pay it in full won’t look quite so ugly when you see it in a few months.

The third reason, and it’s a big one, is that our debt load has started to increase the arrears and write offs that card issuers are having. So if they increase your payment, they get paid back faster, and have less risk. But we can also start to look for limits to be cut back for a ton of people in the next wave of clam downs. In the US, $1.5 trillion has been cut from credit limits and they’re not done yet.