Minimum Repayments On Credit Cards – How Damaging It Can Be

The interest rate (the cost of borrowing money): Borrow 1,000 at 20% APR over a year and youll be charged 200 interest (20% of 1,000). Therefore the lower the interest rate, the less debt costs you.

The length of borrowing: This is just as important as the interest rate. The longer you borrow for, the more interest youre charged as 20% APR means youre charged 20% of your outstanding debts every year, plus interest on any previous interest. This is crucial with minimum repayments, as by only repaying the minimum, you are effectively borrowing for longer and therefore paying much more interest. Therefore the quicker you repay, the less it costs you.

The minimum repayment: Unlike mortgages and loans, with credit cards you choose what you repay; the more you pay the faster the debt disappears. The only restriction is that there is always a prescribed minimum repayment: the lowest amount you must repay each month to avoid a fine. Rather than a fixed amount, it is usually 2% or 3% of the outstanding debt, with a 5 minimum. We need to repay debt as quickly as possible, but credit card companies want to keep us repaying our debt and earning them interest. Minimum repayments are designed to do just that.

The important thing to understand is that as the minimum is a percentage of your outstanding debt, then as your debt decreases, so does the amount you repay. This means most of your repayment usually goes just to paying that months interest, rather than actually decreasing the amount you owe. There are two main reasons most people make just the minimum repayments. The first is because they simply dont know how damaging it is; if thats you, just increase the amount you repay immediately and the problem is solved.

But for most its because they simply cannot afford to pay any more than the minimum. If thats you please get in touch with a financial advisor or someone who can help you with managing your debts.

What can you do: simply make a fixed repayment based on what you can afford; rather than allowing the repayment to decrease each month. Always set up a Direct Debit to automatically repay credit cards as it means youll never be fined for missing or making a late payment but if you do have bank charges see our reclaim bank charges section on our website.