There is no doubt about the convenience of having a credit card. These days, it is almost impossible to do anything without one – whether it’s making travel reservations, purchasing a large item, or even using it for recurring bill payments.

Let’s face it: most of us have been in a “jam” and needed to make a large purchase using a credit card, knowing full well that we were not entirely sure how we would pay it off in full before the end of the month and before interest started accumulating.

For me, this happened when my husband and I were living in Canada in 2003. We had just bought our first home and were living pay cheque to pay cheque, as every last cent was going into house improvements.

Then, one fateful week, our stackable washer and dryer, as well as our fridge, broke down. It was a very expensive week. Thankfully, the credit card came to the rescue – but not without a cost, as we ended up paying a significant amount of interest until the debt was cleared, and a very valuable lesson on how high credit card interest can be!

With that said, using a credit card without paying it off in full by the end of the month can be a dangerous game. If you only make the minimum payment for several months, the balance on your credit card for that one large purchase continues to climb despite your payments.

One of the most common mistakes credit card holders make is paying only the minimum amount each month without realising the long-term consequences.

Making only the minimum payments on a credit card can be a recipe for disaster, leading to a cycle of debt that can be difficult to escape.

What is a minimum payment?

A minimum payment is the smallest amount a credit-card issuer will accept each month. It is usually a percentage of the total balance, often about 2 per cent to 3 per cent of the outstanding amount.

For example, if you have a credit-card balance of $1,000, the minimum payment might be $25.

Why is making minimum payments a problem?

When you only pay the minimum payment, you’re not making a dent in the principal balance – the amount you actually borrowed. Instead, you’re primarily covering the interest charges, which can be substantial.

For example, if you have a credit card with a $1,000 balance and an interest rate of 18 per cent, and you only make the minimum payment of $25 each month, it will take you ten years to pay off the debt – costing you more than $6,000 in interest!

The reality is that making only minimum payments on a credit card can lead to several problems. Here are the top five issues that occur:

1, Accumulation of interest: paying only the minimum means you’re not reducing the principal balance, so interest charges continue to add up

2, Debt spiral: when you pay only the minimum, you make little to no progress in paying off the debt. This can lead to a cycle where you remain in debt for years, with no clear end in sight

3, Damage to your credit: making only minimum payments can harm your credit score over time and impact your ability to borrow in the future, as it signals that you’re not managing your debt responsibly

4, Increased fees: some credit-card issuers may charge late fees or other penalties if payments are not made on time

5, Loss of money: over many years, interest charges and fees can add up to thousands of dollars – money that could be saved or used for other purposes

In 2022, Forbes magazine published an article about how credit-card debt can spiral out of control. Although it is based on US salaries and monthly expenses, it provides an excellent example of the long-term impact of credit card debt and is a good ‘eye opener’:

Initial situation

• Income: Sarah earns $3,000 per month

• Total credit-card limit: she has two credit cards with a combined limit of $5,000

• Current debt: Sarah has accumulated $2,500 in credit-card debt

Spending and interest accumulation

Monthly expenses: Sarah’s monthly expenses total $2,500, including rent, groceries, utilities, and minimum credit-card payments.

Lifestyle choices: to maintain her social life and cover unforeseen expenses, she starts using her credit cards more frequently, charging $500 each month on discretionary spending (dining out, shopping, etc).

Interest rates: Sarah’s credit cards have high interest rates, averaging 20 per cent annually. As a result, she accrues about $50 in interest each month (based on her average daily balance).

Escalation of debt

• Monthly interest:

– Starting balance: $2,500

– Monthly spending: $500

– New balance: $2,500 + $500 = $3,000

– Monthly interest charge at 20 per cent: $3,000 x (20% x 12 months) = $50

– Total balance due: $3,000 + $50 = $3,050

• Monthly payments: if Sarah continues to pay only the minimum required payment of $100 each month:

– New balance after payment: $3,050 – $100 = $2,950

• Repeat: each month, the cycle continues – she adds $500 to her card, incurs more interest, and pays only the minimum

Consequences

• Cumulative debt: after a few months, her debt keeps growing:

– Month 2: $2,950 + $500 + $50 interest = $3,500 going into Month 3

– Month 3: $3,500 – $100 = $3,400

The debt continues to compound due to high interest and ongoing spending.

Over-limit fees: if Sarah reaches her credit limit, she may incur over-limit fees, further increasing her balance.

Financial Impact

• Debt cycle: unable to pay off the full balance, Sarah risks falling deeper into debt, potentially leading to the involvement of debt collectors and further financial strain.

At the end of the day, some of the most important lessons to be had is, don’t borrow what you can’t afford to repay in a timely manner. It is imperative to save for a rainy day and build an emergency fund so that when your appliance or car breaks down, or other unexpected expenses arise, you have the means to cover them outright – rather than going into debt or, worse, relying on credit cards.

References

Illvan, I. (2024) Forbes magazine. Impacts Of Credit Card Delinquencies On The Finance Industry At Large. Available from: https://www.forbes.com/councils/forbesfinancecouncil/2024/03/29/impacts-of-credit-card-delinquencies-on-the-finance-industry-at-large/ [Accessed 2 February 2025].

• Carla Seely has 24 years of experience in the international financial services, wealth management and insurance industries. During her career, she has obtained several investment licenses through the Canadian Securities Institute. She holds the ACSI certification through the Chartered Institute for Securities and Investments (UK), the QAFP designation through FP Canada, and the AINS designation through The Institutes. She also holds a master’s degree in business and management