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Hi All,

Why do banks require a minimum monthly payment on a line of credit that still has available funds? I find myself in the situation where interest is charged each month and debited to my account. I then have to transfer money from my line of credit to my chequing account, and then back to my line of credit so as to make the minimum monthly payment (which is the amount of the interest charged).

Why don't they just debit the interest charge to the line of credit and leave it at that?

Cheers.
 

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Because the government has mandated that you shouldn’t actually be allowed to get into more debt than you can handle. Their solution was a minimum payment to show that you can actually service the debt.

The fact that you can’t, and need to borrow to repay your loan each month should be a big red flag that you’re probably doing something wrong financially.
 

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Because the government has mandated that you shouldn’t actually be allowed to get into more debt than you can handle. Their solution was a minimum payment to show that you can actually service the debt.

The fact that you can’t, and need to borrow to repay your loan each month should be a big red flag that you’re probably doing something wrong financially.
Thanks for your reply. To be clear, I'm able to make payments, I was just curious about the process.
 

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You can do it yourself if you want. Withdraw the amount of the interest due to your chequing account, bank withdraws it back on the due date.
People do this all the time as part of the Smith Manoeuvre. I believe it's called capitalizing the interest and allows the loan to remain fully deductible (if used for investments).
 

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what will you do when your run out of available funds? will you go get your payments off another LOC?

To answer the basis of your question, banks charge a min payment to make money. They lend, you pay. Simple as that.

From what you posted here and in your other thread, it does not seem to understand credit too much. I would be very cautious if I were you. You’re not headed in the right direction.
 

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I get what you are saying, there is absolutely nothing stopping you from just taking out the amount you owe for the minimum payment into your account, and then putting it back in as the minimum right away...

That said, I hope you aren't at a point where the minimum payment on your credit is more than you can actually afford.
 

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I get what you are saying, there is absolutely nothing stopping you from just taking out the amount you owe for the minimum payment into your account, and then putting it back in as the minimum right away...

That said, I hope you aren't at a point where the minimum payment on your credit is more than you can actually afford.
Thanks for the response. I've been paying the LOC down, and the outstanding balance continues to shrink. I was just curious as to why they don't just debit the LOC with the amount interest owed and leave it at that. That would have the same effect as a payment, without the need to facilitate a pre-auth payment or having to worry about ensuring the payment is made each month (which if missed could result in penalty fees).

As some of the other users have commented (with unnecessary negative tone) is that at some point you will hit your limit and this method of payment won't work. Although that is the case, could the bank not at that point simply start requiring actually transfers of the minimum into the account?

At the end of the day, perhaps there are policy reasons for requiring the actual transfer to facilitate payment, maybe the aim is to ensure the debtor is more acutely aware of the status of their LOC, or maybe it would just be too difficult administratively for banks to switch from one form of payment (debits) while there is still credit available, to another (transfers) when the credit runs out.

I simply raised the question for the sake of discussion. Cheers to those who provided constructive feedback.
 

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Not sure I understand your question but it seems as if you want a loan from the bank and only pay it back when it’s convenient to you. Banks make money off your interest payment so if they keep refinancing their own interest, where’s their profit?

If you want to live in the negative, you should maybe look at products such as Manulife One. The whole chequing account is a line of credit. You never have to worry about minimum payments and they just keep deducting fees and interest month over month.

Of course, this type of account is meant for someone with many recurring expenses but also a steady income stream. If you don’t replenish you account once it reaches its limit, you’ll be considered in default.
 

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Credit cards work the same way. At least if the process was done the way you described, then the borrower would at least understand that they are not making any payment at all.

My complaint with LOCs and credit cards is simply this. If a person owes $1,000 on a credit card and makes a $300 payment (pretend the minimum is $20) then they will feel like they are doing very well with their repayments and are handling their credit well. If at the end of the month, due to some more purchases, they now owe $1,200, they do not change their mind about their good use of credit.

The reality is, however, that as I see it, they did not actually make any payment at all and actually required an additional $200 to make it through the month. In my opinion, they are similar to any other deadbeat that does not pay back the money they owe, but in our societies eyes, they are doing just fine. I would argue that a lot of Canadians fall into this situation and don`t even realize the deadbeats they really are.

For that reason, I would suggest handing credit cards and LOCs considerably differently. I won`t bore you with the details, since I can`t say it would change anything but it would at least force a better use of credit then many Canadians are currently doing.
 

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The odd thing is, I don’t know many people who would go to the store and willingly pay $200 for something that costs $100. It’s not smart shopping in anyone’s opinion right?

However, by not paying off the line of credit, or credit card people often pay double, triple or more when you factor in the interest.
 

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The CC make money even from them because of the transaction fee they charge to the seller.
I believe that in the overall economic picture, that is where the real money is. But this revenue is carved up into the bank/credit clearer that the vendor uses (eg: BMO), the credit card company (eg Visa), the actual credit card issuer (eg: TD) the "perks" operator (eg: Aeroplan) or cash-back to the user or whatever. The pie is sliced fairly thin. Once the debt is in the hands of the issuer (eg: TD) any interest is all theirs. It's 100% of a smaller pie, but definitely an income stream.
 

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Hi All,

Why do banks require a minimum monthly payment on a line of credit that still has available funds? I find myself in the situation where interest is charged each month and debited to my account. I then have to transfer money from my line of credit to my chequing account, and then back to my line of credit so as to make the minimum monthly payment (which is the amount of the interest charged).

Why don't they just debit the interest charge to the line of credit and leave it at that?

Cheers.
Because you cannot pay debt by debt. You have to make at least interest payment
Read this book
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For sure, but that's a one-time fee. Paying the monthly minimum is a gift that keeps on giving.
If they buy and pay, you get a low risk return, I'd be happy to scoop up a lot of these customers, reliably cover my overhead and provide a slim profit.

If they are carrying a balance, they might stop paying, now deliquincy rates are only 3.5% or so for CC.
https://cba.ca/credit-card-delinquency-and-loss-statistics

I would assume those are larger balances (my average balance is rather low since I pay it off), and remember that larger balance isn't making them money, since the debtor isn't paying anyway.

http://business.financialpost.com/news/fp-street/canadas-big-banks-stand-to-lose-on-credit-card-debt-in-the-next-downturn-moodys

There is a reason new mortgages need to be stress tested, the government sees a big debt servicing problem coming.
Those low risk, low margin customers are looking better all the time.
 
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