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The minimum repayment mistake costing you money

Are you one of the 1.6 million people in the UK who are getting charged for repeatedly making the minimum repayments on credit cards? Doing this might be the cheapest way to avoid charges, but it’ll end up costing you much more in the long term.

When you spend on a credit card, you buy now, pay later. If you can pay the full balance off every month you can avoid interest charges on what you owe.

But if you can’t afford that, you can choose to pay off a smaller amount each month until the debt is cleared. The minimum repayment is the amount you need to pay to avoid extra charges and fees. However, you will be paying high rates of interest on the debt.

The extra cost of minimum repayments

Minimum repayments are normally a percentage of your debt. Part of the problem is every time you make a payment and lower what you owe, the minimum repayment drops too.

This can mean it takes years to actually clear a debt – and while you owe money, you keep getting charged interest, meaning the original amount you borrowed will end up costing you even more.

If you borrowed £1,000 on a card charging 18% interest, a payment of £100 a month would clear the debt in 11 months and cost you £85. But repaying just £30 would take three years and 10 months and cost you £353 in interest.

The Financial Conduct Authority’s latest report into the credit card market has looked at the cost of minimum repayments, and found close to 9% of all active credit cards would take more than 10 years to pay as the borrowers are just making the minimum each month.

Ways to cut the cost of your credit card borrowing

For some, making minimum repayments is just habit rather than the only choice.

One way to reduce the over cost of the money you borrow on credit cards is to pay back as much as you can afford – not the minimum you need to. Setting up a Direct Debit for this amount – rather than a percentage – will mean you clear your debt far quicker and get charged less interest.

If you’ve got a decent credit rating, you could apply for a 0% balance transfer credit card, where for a fee, you can move your debt to a different card which doesn’t charge interest for a limited time.

You still need to make a minimum repayment, but this gives you time to spread out payments. Just make sure you have a plan to clear the debt before interest begins to get charged again.

The dangers of missing payments altogether

Of course, even just making the minimum repayment is better than missing a payment.

You’ll probably get charged a late or missed payment fee. If this is a one-off, it’s worth contacting the credit card company and asking if they’ll let you off. Setting up a Direct Debit can help avoid this happening.

Any special offer you have – such as a 0% rate or your credit limit could also be reduced.

The biggest risk though is the damage a missed payment could do to your credit rating. Your credit score can be the difference between getting a mortgage, mobile phone or bank account and not getting it.

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