Personal Finance

The Falsehood of the Minimum Credit Card Payment

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Over Christmas, my Dad was looking at his credit card statement and noticed that if he multiplied the Estimated Time to Pay Using Minimum Payment by the minimum payment he would actually have paid less than the balance. I thought he was being a bit cranky but I looked at my credit card and sure enough:

Balance: $5123 Estimated Time to Pay: 40 years, 9 months Minimum Payment: $10

Let’s do the math shall we?

489 months × $10 = $4890

So I can pay the minimum payment for the next 41 years and actually pay less than I owe? Sweet!

Of course, that’s a dream. It’s a much uglier situation. A 20% interest rate means that the interest per month is around $85/month. That’s more than the minimum payment, which means that the balance grows and the interest will grow with it. Which means that the card will never ever get paid off at the minimum payments. And I assure you that a risk control system will ratchet down the screws on an unsuspecting customer just at the wrong time.

I don’t have a problem with the product per se. If you’re going to use credit, then you need to take a bit of personal responsibility with it. But a flat out lie? We already have woeful financial literacy in this country – it isn’t right that a financial institution can deliberately mislead a customer.

I posted a query to the “TD Helps” website to ask about the arithmetic and Alex D. from TD Canada Trust replied to my note within 15 minutes (kudos for the blazingly fast response):

The purpose of the “Estimated Time To Pay” calculation is to explain to our customers why it’s important to make more than the minimum payment on the TD Credit Card. I agree that the estimate could indeed be more accurate, however whether a customer is led to believe that it will take 40 years and 9 months or 50 years and 8 months, the message is clear that more than the minimum monthly payment should be made in order to get ahead of the interest costs. I will follow up with your TD Credit Card department and determine how they calculate this estimate and update this thread when I have more information.

I’m still waiting for that follow-up more than a month later. But it’s still an unsatisfactory response in my opinion. The arithmetic is simple and there’s no justification to lie to the Canadian consumer.