Beware: paying the minimum repayment on credit cards will maximise debt
by Anonymous

July 17, 2004 -- As many credit card providers reduce their minimum monthly repayment requirements for borrowers, moneysupermarket.com warns consumers who only ever repay at this level, that it could take them up to 26 years to pay off their debt* if they do not consider making higher repayments.

Analysis by moneysupermarket.com, the website where people can compare personal finance products and apply online, has found that the majority of credit card providers have their minimum monthly repayment (MMR) requirements set at an all time low - at just 2-3% of their balance each month. In fact, many leading credit card providers have reduced their MMR requirements over the last few years.

For example, Barclaycard Classic's typical MMR five years ago was up to 5% of the balance, but today this has been reduced to just 2.5%, whilst Halifax, Bank of Scotland and the Co-operative have reduced theirs from 3% to 2% in the same period.

Even the Treasury Select Committee warned last week on the dangers of only making the minimum repayment each month and suggested card providers include a generic warning on their statements. Currently 12% of card borrowers pay just the MMR or less,** but as consumers' purse strings are tightened by increasing interest rates and inflation, many more may choose to cut back and repay as little as they can.

But these consumers should beware. On a typical credit card balance of £2,200 with a standard APR of 13.9% (such as Egg Visa), it would take 26 years to pay off the debt in full if the required minimum payment of 2% was paid each month. Plus, over that period, a whopping £2,463 extra would be paid back in interest. However, if the consumer repaid 5% of their balance each month, not only would it take 18 years less to repay, they would also save £1,863 in interest payments.

Stuart Glendinning, director of credit cards, moneysupermarket.com said: "Whilst the level of credit card debt is on the increase, mostly due to competitive rates of interest and promotional offers on credit cards, many card providers are becoming less stringent about their repayment requirements. The consequence of card providers reducing their required MMR is that consumer debt is prolonged over a much longer period, often leading to more interest being paid over the term."

Glendinning continued: "Paying just the minimum payment each month may help keep consumers initial monthly outgoings low, but in reality it will cost them a great deal more over the long term. Instead, it is better to clear the balance outstanding as soon as possible to minimize the interest charges incurred, or consider transferring the balance to one of over 70 credit cards that offer 0% APR for an introductory period. Over this period they can at least pay back the minimum amount and avoid incurring an interest charge."

moneysupermarket.com's research also highlights that whilst the minimum monthly repayment (MMR) remains low, it also means that the gap between the required MMR and the monthly interest levied has shortened. For example, a debt of £2,200 on a Lloyds TSB Classic card with a standard APR of 17.9% would equate to a monthly interest rate of 1.4%. However the minimum repayment is 2%, so only 0.6% actually goes towards paying off the actual debt, as the table below shows.

moneysupermarket.com is a website where consumers can compare the cost of personal finance products, save money and apply online. The website has more than 25 different channels, including the credit card channel where over 300 cards, including charity cards, can be compared and purchased online. Visit http://www.moneysupermarket.com/cards/credit_card.asp for more information.



This article courtesy of http://www.credit-card-debt-assistance.com. You may freely reprint this article on your website or in your newsletter provided this courtesy notice and the author name and URL remain intact.

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