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Credit Card Guide
Credit cards – The danger of minimum repayments
Updated: Monday 5 December, 2011
By Martin Fagan
Is just making minimum repayments on your credit card really that bad? Yes! We show you just how damaging it can be.
Only having to pay a fiver towards your burgeoning credit card bill each month may sound like an attractive proposition, but just making the minimum repayment is very dangerous and could lock you into debt for over 30 years.
In this guide we look at the true cost of making just the minimum repayments and show you how to avoid falling into the trap.
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- What are the dangers of minimum repayments?
- How serious are the dangers of minimum repayments?
- Are some credit cards worse than others?
- How to avoid the danger of minimum repayments
- Things to remember
What are the dangers of minimum repayments?
The longer you are in debt, the more interest you will pay on your debt and the more your debt will cost overall.
When you have debt on a credit card, you can choose how much of your debt you pay off each month - above a set minimum. Ideally, to avoid paying any interest at all, you would pay off your balance in full at the end of every month. Unfortunately, for many people who have built up large debts on a credit card, this is not possible.
The minimum repayment you must make each month is generally a percentage of what you owe (typically 2-3%) or a set amount (typically £5), whichever is greatest. Do not be fooled into thinking that making these payments is clearing your debt.
Making only these minimum repayments each month means you will hardly make a dent in your credit card balance, and this could prevent you from escaping the burden of debt for years and years to come.
The option of making minimum repayments is designed to prolong the period of time you are in debt. The longer you are in debt, the more interest you will pay and the more profit the credit card company will make from you.
Many credit companies also operate a system of “negative payment hierarchy” (NPH). This means your repayments are directed to your cheapest debts first, and so the expensive ones – like cash advances – continue accruing massive amounts of interest until your balance is cleared.
New rules from the government mean card issuers are now obliged to operate a “positive payment hierarchy” where you pay off the most expensive debt first. However, some card issuers that have been hit with a loss of revenue from a NPH have surreptitiously lowered their minimum payments so people stay in debt longer and pay more interest for the privilege.
The numbers bear this out: two years ago, the average minimum payment was 2.5% per cent of the overall balance; it is now 1%.
How serious are the dangers of minimum repayments?
If we look at some examples, it’s easy to see the dramatic effects of just making minimum repayments. The table below shows you how long it would take to clear your debts*, and the massive amount of interest you would pay, if you only made minimum repayments:
| Existing debt | Time to clear debt if you make minimum repayments* | Total amount you’ll pay | Total interest you’ll pay |
| £1,000 | 19 years and 4 months | £2,248 | £1,248 |
| £3,000 | 29 years and 3 months | £7,157 | £4,157 |
| £5,000 | 33 years and 10 months | £12,066 | £7,066 |
*Assuming the minimum repayment is a typical 2.25% or £5, whichever is greater, and the credit card has an APR of 16%.
Even for a debt of £1,000 you could spend nearly two decades making minimum repayments before getting your freedom back, at which point you would have paid more than double what you borrowed. Think of it like this: if you load £3,000 on a credit card when you’re 21 and make only the minimum payment every month, you’ll be 50 before you’ve paid it off. Scary, but true.
Are some credit cards worse than others?
In a word, yes. The lower the compulsory minimum repayment, the longer you can linger in debt, and the more interest you will pay overall. So, you could say that the higher a minimum repayment is, the better.
However, some credit card companies recently received a fair bit of bad press for increasing their minimum monthly repayments.
Many argued that increased minimum repayments would put added pressure on those struggling with debts. While this may be the case for some, having to make larger minimum repayments will mean people clear their debts in a shorter time and pay less interest overall.
This table shows the current minimum payment terms of some of the most popular credit cards on the market:
| Credit Card | Minimum repayment terms |
| Virgin credit card (www.virginmoney.com) | £25 or 1% the balance total of any card fees, interest and default charges plus the amount of any arrears (previous unpaid minimum repayments). |
| MBNA platinum (www.mbna.co.uk) | Entire balance up to £25 and then 1% of total borrowing plus the range of other factors that make up your monthly credit card bill (for example, interest, card fees and late, over limit or other default charges). |
| Post Office credit card (www.postoffice.co.uk) | The monthly payment will be the greatest of: 2.5% of outstanding balance (minimum £5) or 1% the total of interest plus any payment protection insurance premium plus any monthly payment under any payment plan. |
| Barclaycard gold | 2.25% of your outstanding balance or £5, whichever is greater. |
| Capital One credit card (www.capitalone.co.uk) | 1% of your outstanding balance or £5, whichever is greater. |
| Nationwide Gold Credit Card (www.nationwide.co.uk) | 1% of your outstanding balance or £25, whichever is greater. |
| Sainsbury’s credit card (www.sainsburysbank.co.uk) | 2.25% of your outstanding balance or £5, whichever is greater. |
| Lloyds TSB platinum credit card | 1% of your outstanding balance or £5 or the amounts for interest plus payment protection cover, whichever is greater. |
| NatWest platinum credit card (www.natwest.com) | 1% of your remaining balance or £5, whichever is greater. |
| Santander credit card | 1% of your outstanding balance or £5 or the total of payment protection premiums plus interest and fees, whichever is greater. |
In all cases, if your balance is lower than the minimum monthly repayment (typically £5) you will be required to clear the balance in full.
Most credit card providers state their minimum monthly repayment terms on their website - these should be found in the “summary box”. Over the past few years, even though they’ve lowered the percentage of the balance they require as a minimum payment, card issuers have finally acknowledged the fact that just paying the minimum every month will clear your balance. In the minimum payment of the summary box they now usually say something like “If you only make the minimum payment, it will take longer and cost more to clear your balance”.
How to avoid the danger of minimum repayments
Most people who only make minimum repayments are unaware of the danger of doing so – now we’ve shown you how they affect your finances, you’re ready to avoid them.
As stated before, ideally you would pay off your credit card bill in full at the end of every month, but if this is not possible, then you should try at least to make more than just the minimum monthly repayment.
The more you can pay off the better, and making fixed monthly repayments, instead of just paying the minimum can have a huge impact on your debt. For a credit card debt of £3,000, the table below shows the dramatic effect that increasing your monthly payment will have:
| Existing debt | Monthly repayment | Time to clear debt | Total amount you’ll pay | Total interest you’ll pay |
| £3,000 | Minimum* - first payment will be £67.50, then will gradually reduce. | 29 years 3 months | £7,157 | £4,157 |
| £3,000 | £75 | 4 years 10 months | £4,316 | £1,316 |
| £3,000 | £100 | 3 years 3 months | £3,857 | £857 |
| £3,000 | £200 | 1 year 5 months | £3,370 | £370 |
*Assuming the minimum repayment is a typical 2.25% or £5, whichever is greater, and the credit card has an APR of 16%.
Even just setting your payments at £75 (only a little higher than the initial payment you would make with minimum payments) would shave more than 20 years off the time it would take to clear your debts and save you a massive £2,841 in interest.
If you can scrape together £200 a month, you would save yourself £3,787 compared to making minimum repayments and would become debt free in just one year and five months.
The best way to make sure you are on top of your debt is to set up a monthly direct debit payment from your current account to your credit card. Your credit card provider may not make this easy for you, as it means they won’t be able to squeeze as much interest or extra charges from you, but stay firm in your intentions and insist that it is set-up.
(Even if you can only afford the minimum repayments, or plan to make them while you focus on clearing another more expensive debt, to avoid charges for late payments and damage to your credit rating, you should still set up a direct debit.)
Things to remember
As well as making sure that you are making more than just minimum monthly repayments, if you have large credit debts you should think about transferring these debts to a different card.
Transferring your balance to a credit card with a 16 month 0% balance transfer deal could save you hundreds of pounds in interest.
These 0% deals can be useful as they may allow you to avoid paying any interest on your debt for a set period of time (although you will have to pay a balance transfer fee, generally around 3% of the balance you’re looking to transfer, and will still have to make at least minimum monthly repayments).
However, after the interest-free period is over you will be charged interest, so if you think you won’t have cleared your debts within this time you may want to look at getting a lifetime balance transfer card instead. These cards offer a low interest rate for the life of your balance and can sometimes be the best option.
To start tackling your credit card debts, consider transferring them to a decent card charging the lowest rate of interest and then make the biggest monthly payments you can afford.