Credit Cards

Quebec tackles debt with new 5% minimum credit card payment rule

By: Lisa Coxon on August 2, 2019

Under a new law effective Aug. 1, Quebec residents who own a credit card will be required to pay at least 2% of the outstanding balance, with gradual annual hikes that will eventually bring the minimum payment required to 5% of the outstanding balance by 2025. 

Credit card providers can decide at their discretion not to implement the gradual annual increases and instead jump right to 5% of the outstanding balance required as a minimum payment.

“I think they're going to be very careful about that,” Scott Hannah, president and CEO of the Credit Counselling Society, told CBC News. “Because that could indeed put someone in financial difficulty very quickly.” 

The new law requires any new credit cards opened after Aug. 1 to have minimum payments of 5% right away. That 5% might seem high, but that was pretty standard for minimum payments 20 years ago, according to Charles Tanguay, a spokesperson for l'Office de la protection du consommateur, who spoke with CBC News on the matter.

Credit card providers will also now be required to give cardholders an estimate of how long it would take to pay off their balance if they continued to make just the minimum payment.

That’s a crucial move, considering in 2017, 40% of Canadians didn’t understand why paying more than the minimum payment was important.

Credit card statements often just provide borrowers with the minimum payment required, but don’t explain the effect that minimum payment will have on their outstanding balance, namely how long it would take to pay off the entire balance if they only paid this amount every month. 

Minimum payments largely account only for interest accrued on the outstanding balance, but put very little toward the principle. Those who pay only the minimum payment are effectively locking themselves into a long and expensive debt repayment cycle.

The CBC provided an example: if you have a credit card balance of $1,000, at 19.9% interest, a minimum payment of 2% of the balance every month would take you 26 years to pay off that amount. You’d have paid $3,001 in interest along the way.

By increasing the minimum payment to 3%, your pay-off time drops to about 11 years and you pay less than $1,000 in interest. Hike that minimum payment once more to 5% and you’ll have it paid off in six years, with only $442 owing in interest.

So, while having to pay more per month might irk some credit card holders, it will actually benefit them in the long run. 

The new provincial regulation is aimed at improving household finances in the province.

“We're carrying an awful lot of debt,” said Hannah. “The average Canadian, excluding their mortgage, is carrying $22,000 worth of credit card debt, lines of credit debt and other loan debt, which is substantially higher than in the past.”

Will other provinces follow suit?

"Other provinces in Canada will be looking at this carefully, and if they're not seeing a lot of challenges or uproar from consumers or credit granters, they may elect to adopt similar legislation,” said Hannah. 

"... this just makes good fiscal sense. For those who've gotten themselves into debt, this will help them."