According to our research, two million Canadians between 18 and 35 paid an average of $650 in credit card interest in 2018. That's a year worth of phone bills, three months of groceries or a mini-vacation gone in paying credit card interest.
More astonishingly, the two million Canadians mentioned above are only carrying $3,100 in credit card monthly balance to pay $650 in interest. To put all of it into perspective:
If someone took a one year loan worth $3,100 and decided to pay $650 in interest, that person would pay 37% in the interest rate.
That's a far cry from the already expensive interest rate credit cards promote. It's what predatory loan companies charge their customers.
How do credit cards work?
Far too many young adults in Canada make the mistake of paying the minimum balance suggested by their credit card companies. The minimum balance barely covers the month's interest; most of the debt gets carried over to the following month, where interest is charged all over again.
Here's an example:
Lina has $3,000 in credit card debt with 24% annual interest rate
- She is being charged approximately 2% interest every month
- She is paying $100 a month in minimum balance
In the first month, $60 of Lina's payment will go towards paying interest. Lina's balance at the end of the month would be $2,960. Within a year, Lina would end up paying $1,200 in total with $663 in interest. She would still end up owing more than $2,460.
How to pay off credit card fast
Here's what you should do to avoid being in Lina's position:
- Create a personal budget for free on a google sheet. If you're willing to pay for more features, get YNAB.
- Calculate your payment options using this free credit card interest calculator.
- Payoff the balance past the grace period; here's an article explaining it more in details.
- As a minimum, make sure to pay at least 10% of your monthly credit card balance.
We have taken American data by age group as the basis for our calculation (such as interest amount, revolver rate and average balance). Given that Canada and United States have similar socioeconomic attributes, we assumed the revolving rate by age group will be the same for both countries. We have then adjusted average interest amount by the difference in credit card interest rate between both countries and average credit card balance by age group based on the difference in average credit card debt between both countries.
We have compiled our calculation exclusively based on the following sources: Statistics Canada, Federal Reserve of Boston, Federal Reserve Bank of New York, IBISWorld