Why Credit Card Automatic Minimum Repayments Are So Dangerous

In a recent change to credit card regulations, the government began to require that all credit card statements included a warning that only ever making the minimum repayment required would significantly increase the length of time it took to clear the debt, resulting in the payment of much more interest in the long term.

How seriously should you take this warning? Extremely seriously.

Only paying the minimum charge, often 3% of the balance or thereabouts, will have a dramatic effect on the cost of your debt, as we will see in the following example.

Let's say you had a £2,000 balance on a card with an annual interest rate of 16.9% and a minimum repayment figure of 3% of the balance. If you only ever paid the 3% required, it would take a staggering 16 years and 5 months to clear the debt, at a total cost of £3,640.10 - that's over £1,600 in interest payments.

Now, 3% of £2,000 is £60, so if you committed yourself to paying this amount every month, what would be the outcome?

Answer: The time taken to repay in full would drop to 3 years and 10 months, and the interest cost would fall to a more reasonable £719.

Paying a little more than the £60 would have even more beneficial effects, but that might not be possible due to financial circumstances. However, given the slow rate that your minimum repayment will drop over time, there's no reason not to fix your repayments at your current minimum, or even better a few pounds above it - the long term benefits to your finances will be considerable.