Credit Card Basics : Minimum Repayments

When you receive your card statement each month, you will see a figure for the minimum repayment you must make in order to keep your account in good standing. This fee is calculated as a percentage of the outstanding balance on the account, or a flat fee of 5-20, whichever is the greater.

Many people choose to set up a direct debit to pay this minimum fee each month, to ensure that they don't forget to make their payment, and this is strongly encouraged by the card issuers - but not for the reason you might first think.

At first glance, it would make sense for the card issuer to collect payments on time automatically by direct debit, as this would reduce their administration costs. A closer look might suggest to more cynical observers that such is the income card companies enjoy from late charges, there must be another good reason to collect minimum repayments by direct debit, and of course there is.

Downward drift

Over the years, the minimum percentage has drifted downwards. Originally, a figure of 5% was common, but nowadays you're much more likely to see something in the region of 2% to 3%. When you consider that an average card will be charging around 1.5% of the balance in interest each month, it's clear that in these cases most of your repayment will be swallowed up by interest and little of it will go towards actually reducing your balance.

This means that it will take considerably longer for you to pay off your debt, and the overall amount of interest you'll have to pay in the process will be much higher - a fact which is much better for the banks' bottom lines than it is for your pocket.

Top Up Your Payments

So, although it's a good idea to take advantage of the convenience of the monthly direct debit feature to ensure you avoid any late charges, it's also very important to try and top up this payment a little each month, even if only by a few pounds - otherwise, you'll be a slave to your card repayments for years longer than you should be.


Related Articles:



Credit Card Sense