Making just the minimum payment on their credit cards and loans is leading more consumers into delinquency, according to a new survey out Wednesday.
Chicago-based TransUnion surveyed 1,010 consumers in Canada and found 88 per cent of credit card holders in Canada often pay a greater amount than their minimum due on their revolving debts each month. Despite that, 39 per cent of those credit card holders are uncertain of the benefits of paying off more than the minimum balance.
“Making more than the minimum payment makes them a more attractive customer to their financial institution,” said Todd Skinner, president of TransUnion Canada.
TransUnion is now using what it calls a trended data report over 24 months, instead of a monthly snapshot, to give a more clear portrayal of the state of someone’s finances. It corrects a picture that might be skewed if, for example, your credit score was taken in January after your debts were ramped up following the holiday season.
The credit agency has also created what it calls a total payment ratio metric to identify the correlation between the payment amount and the delinquency across multiple products. The TPR is calculated by dividing a consumer’s total monthly credit payments by the total minimum due on all of the consumer’s credit products — the higher the TPR the less likely a consumer falls behind on payments.
For instance, someone making $400 in payments on three credit cards when the aggregate minimum due was $200 would have a TPR of 2.0. Someone with $1,200 in payments with an aggregate minimum due of $200 would have have a TPR of 6.0.
In its study, TransUnion found among Canadians with a TPR of less than five on their credit cards there was a 1.77 high risk of auto loan delinquency — defined as not making a payment for 90 days or more. Once the TPR rose to more than 15.0, the high risk of delinquency dropped to 1.4 per cent.
“This may sound intuitive — consumers who are able to pay more usually have more liquidity and therefore are less likely to miss payments. But it is the quantification of this intuition that is important,” said Ezra Becker, vice-president and head of TransUnion’s global research operations. “Our study confirmed that as TPR increased, delinquency rates declined for credit cards and auto loans.”
Laurie Campbell, executive director of Credit Canada, said making the minimum payment on a credit card leaves you little chance of actually ever getting out of debt. “Don’t forget about the interest rates on these credit cards,” said Campbell, referring to rates that can easily be above 20 per cent annually. “It’s going to be an avalanche of debt. My guess is when people starting making minimum payments on credit cards, they are borrowing from one card to pay another. There’s a lot of moving money around but nothing getting paid down.”
Monthly statements in Canada now include a line says how long it will take to pay off your credit card bill in months, making only the minimum payment every month and not adding to the outstanding balance.
‘It’s legislated but not as to how they put it on the statement. It’s usually in the fine print in the bottom of your statement,” said Campbell. “You end up paying three times as much for everything (once you consider the interest).”