The shocking figures are based on only making the minimum repayment on a credit card balance of £2,604†, with a fixed interest rate of 19.9%APR‡.
Worryingly, the anticipated interest costs will be even greater for those customers stuck with a higher annual percentage rate.
Furthermore, a staggering 80% of people are unaware of the dangerous trap they could fall into by only making minimum repayments, leaving them with debt that will take over a quarter of a century to clear.
Small change, big win
The credit experts advise that one way to avoid this pitfall is by paying a slightly larger, fixed amount each month.
For example, if the first minimum repayment on a £2,604 credit card balance is £66, setting the monthly repayments at this thereafter, while the outstanding balance continues to decrease, could avoid customers from paying an extra £2,367 in interest.
Moreover, this payment plan means it will take just over five years to pay off the balance — more than five times faster than the 26 years it will take to clear the same balance when only making minimum repayments.
Alastair Douglas, CEO of credit experts TotallyMoney, comments:
“While it’s alarming how much money people can save by making one small change to their repayment habits, especially as figures suggest there’s over £580 million lost in interest charged each month, it’s even more concerning how many people don’t know how making only the minimum repayment impacts them.
“It’s understandable that in certain months customers can only afford the minimum repayments, and sometimes it may be tempting to make a smaller repayment to keep as much cash in the bank as possible. However, the figures show this is an incredibly expensive option.
“And that’s just the tip of the iceberg. Many will pay even more interest on their credit card balance if they have a higher annual percentage rate.
“At TotallyMoney, we’re on a mission to improve the UK’s credit score and help people move on up to a better financial future. It’s important people are aware of the small change they could make to their repayment habits, as this will help them clear their debts and become debt-free quicker.
“To help people avoid being stung by interest costs, here are my top three tips.”
1) Move your debts to a balance transfer card
If you’re currently paying interest on a credit card balance, you could transfer it to a balance transfer card. These cards let you pay off the balance over a certain amount of time, with no interest. There’s often a small transfer fee, which is worked out as a percentage of how much you transfer, but this is usually much less than what you’d pay in interest otherwise.
2) Use a 0% interest purchase card
These cards come with a period of interest-free spending. That means you can make a large or unexpected purchase, and clear the balance over a set number of months — without building interest.
3) Consider getting a personal loan
The next time you need to borrow money, you may find that a personal loan is a better option for you. With a personal loan, you’re told upfront the fixed amount you’ll have to repay each month, as well as its total cost over the length of the loan. You should avoid payday loans though, as they have very high interest rates, making the total cost of borrowing very expensive.
With any card or loan, it’s always best to check your eligibility on sites such as TotallyMoney before you apply. This lets you see how likely you are to be accepted for what you want, reduces your chances of rejection, and helps protect your credit rating.
* TotallyMoney annual Financial Awareness Survey [conducted by OnePoll. 2,000 UK Adults December 2018]
† Average credit card debt per household: The Money Charity [October 2019]
‡ Average interest rate figure of 19.9%APR: Bank of England [December 2019]
Calculations made using the CardCosts calculator [January 2020]
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