Minimum payments a recipe for trouble

Making just the minimum payment on their credit cards and loans is leading more consumers into delinquency, a new survey out Wednesday shows.

TransUnion s ur veyed 1,100 consumers i n Canada and found 88 per cent of credit card holders often pay a greater amount than their minimum due on their revolving debts each month. Despite that, 39 per cent of those card holders are uncertain of the benefits of paying more than the minimum.

“Making more than the minimum payment makes them a more attractive customer to their financial institution,” said TransUnion Canada president Todd Skinner.

TransUnion is now using what it calls a trend 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 your credit score was taken 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 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 per cent 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 leaves little chance of 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.”

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. — LAURIE CAMPBELL, EXECUTIVE DIRECTOR OF CREDIT CANADA