17 Feb 2019 Alastair Douglas, CEO of credit experts TotallyMoney, comments on the high cost of solely making minimum credit card repayments, urging borrowers to adopt a simple fixed-payment strategy that could save them thousands.
“Paying a bit less each month on your card balance may seem like a great gesture from your credit card company — and might even leave some extra cash in your bank account. The overall cost of this strategy, though, is scary.
“Some people think that a bit less won’t make much difference, but they’re wrong.
“We asked consumers** how long they thought it would take to clear a £2,000 balance at an 18% APR, making just a 2% minimum repayment. Only 1 in 5 realised it would take over 20 years to clear, and 1 in 4 of those expected it to take less than half that time.”
Douglas added: “We understand not everyone can pay their balance in full. However, sticking to a fixed minimum repayment — rather than reducing the payment monthly — can make a huge difference and save a small fortune in interest charges.”
To help people better understand the minimum repayment trap TotallyMoney has created this embeddable interactive:
TotallyMoney recommends customers adopt a fixed monthly-repayment strategy, which can slash interest costs and the time it takes to clear the balance, as highlighted by the example below:
Fixed monthly repayments versus reducing monthly repayments
Customer A and Customer B both have a credit card balance of £5,000 charged at an interest rate of 19.9% APR and must pay a minimum of 3% of the balance or £10, whichever is greater.
Customer A pays the required £150 minimum in month 1 (3% of £5k), but then each month reduces their minimum payment as suggested by their credit card company, based on the outstanding balance. After month 12, the minimum repayment is £128.53; after 24 months, it’s £108.70; and after 36 months, it’s £91.88, and so on…
By carrying on paying a reduced minimum balance month after month, it will take 19 years and 2 months to clear the debt and cost £4,954 in interest.
Customer B also pays the £150 minimum in month one, but continues to pay £150 each month thereafter — even though their card company offers them the opportunity to make a smaller minimum repayment.
This is a simple and much smarter strategy and results in a balance that’s fully repaid in 3 years and 11 months at a much lower cost of £2,035 in interest — saving Customer B £2,919 in interest costs when compared with Customer A.
Douglas warned: “These figures are frightening enough, but customers offered even lower monthly minimum repayments and/or a higher interest rate will face even more extreme costs”.
Andrew Hagger, Personal Finance Expert from Moneycomms.co.uk said: “Card providers make maximum profit from borrowers who continually take up the option to pay the minimum statement balance, and more needs to be done to highlight this costly trap.
“Some people don’t appreciate how much they can save by simply sticking to the monthly repayment they managed to afford in month one. They end up being in debt longer than they need be — and at a huge cost.”
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