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Be Aware of Making Only Minimum Repayments on Credit Cards

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Minimum payments equal high cost debt

When you’re strapped for cash with bills falling through your letter box, while ever you can make a minimum repayment on your credit card to keep the wolves from the door, it can be tempting to continue with no real intention of getting that balance back down to zero.  Even though just paying the minimum payment amount isn’t having an adverse effect on your credit rating and you may have more pressing bills to attend to, in the long run, only making the minimum payment can actually cost you thousands of pounds and a considerable amount more that what you initially spent on your card!

It’s what credit card companies want you to do!

Since April 2011, minimum payments must be at least 1% of the balance including any charges, fees and that month’s interest. Paying only the minimum means that as your balance goes down, so do your payments, which slows the rate at which you are paying off your debt and as a result, means you pay out more for longer. Great for credit card companies, that is exactly what they want, but definitely not great for customers.

The amount of interest you pay will also have a huge impact, as whatever the percentage rate is on your card, you pay that amount on your balance each year. The more years you have a balance on your card, the greater amount you pay. To give you an example of how this can affect you, if you had a card with a balance of £3000 at a standard interest rate of 17.9%, your first minimum payment would be £71.50. After a couple of months, the balance reduces along with the payments, so after a year you are paying £63, after 5 years its £39, 10 years £21 and you still haven’t paid it! Even after 20 years and assuming you don’t use your card for anything else, you will still be paying £6 a month and it would take 27 years in total to pay off what seemed initially a small amount. To add to that, you will have also paid an extra £4000 in interest!

Be Aware of Making Only Minimum Repayments on Credit Cards

Simple steps to clear your credit card debt

A lot of the time, people stick to minimum payments as they can’t afford to pay large amounts. If this is you, you can still follow some simple steps to pay off your card sooner. Firstly, as long as it’s the same or more than the cards minimum payment limit, make a payment each month for as much as you can afford and keep the payments the same. Even if you stick to the first minimum payment of £71.50 but kept paying that each month rather than reducing it, you could clear the balance in 5 years instead of 27 and save over £2400 in interest – a staggering difference!

Consider a balance transfer

If you have a good credit history, you should consider a balance transfer, moving the debt to a 0% interest card. The majority of our repayments go towards paying interest, so by reducing the interest rate, you can quickly reduce your balance. Any payments you make are paying off the debt and can be the cheapest way of borrowing as long as you are able to keep making regular payments – miss one and you may lose your 0% interest rate and it will impact your credit rating. You should always set up a direct debit for paying credit cards too. Missed or late payments usually come with a hefty charge and adverse effect on your credit history, so set up a direct debit for your set amount and if you can pay more some months, there is nothing stopping you doing so.

Pay off the most expensive debt first

As a general rule, you should pay off the most expensive debt first, most of the time that is credit cards, but if it is anything else, make minimum payments to your credit card for a period if necessary until the more expensive debt is paid, then ramp up the payments on your credit cards to save you money and stop lining the pockets of the banks and credit card companies!

Personal loan if you cannot increase monthly payments?

If you know that you will only be able to make the minimum amounts to pay off your credit card, you may want to consider taking out a personal loan to pay off the balance. The interest rate may be considerably lower and the set amounts each month over a set period will ensure your debt is repaid in full and within a reasonable amount of time – after all, who wants to be paying off a card they took out at 21, when they are 50?




About Rebecca Robinson

About Rebecca Robinson

After spending the last 8 years juggling life as a mum of two, wife and working full time as a Project Manager for a global telecommunications company, Rebecca Robinson made the decision to follow her love of writing and took the plunge; turning her passion into a full time career. Since becoming a full time writer, Rebecca has worked with various media and copy-writing companies and with the ability to make any topic relevant and interesting to the reader, now contributes to The Working Parent on articles ranging from credit cards to teenage relationships. Ever the optimist, Rebecca's dreams for the future include a house in the country filled with children, dogs and horses in the field!

Website: Rebecca Robinson

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