For the most part, credit cards are easy to get, and easy to use, but before you know it the total can be more than you expected.
£20 here and £10 there – it all adds up.
If you’re savvy, you’ll get a credit card with added benefits, like cashback, or points towards loyalty schemes. In addition, you’ll have the money ready to pay off the debt at the end of the month, so you won’t have paid any interest.
If this is the case, then good work!
However, if you’re the kind of person to keep the debt rolling from month to month, only paying the minimum, then you’ll be paying the debt down for a lot longer than you expect.
Credit Card companies typically will set the minimum repayment between 2% – 5% of your outstanding balance. At some points, this will only just pay off the interest and not make a dent in your actual debt.
| Name | Amount | Repayment | APR | Total Paid | Total Months | Total Interest |
|---|---|---|---|---|---|---|
| Example 1 | £4000 | 2% | 19.9% | £15,505 | 53 years 5 months | £11,505 |
| Example 2 | £4000 | 3% | 19.9% | £7,906 | 21 years 3 months | £3,906 |
| Example 3 | £4000 | 5% | 19.9% | £5,693 | 10 years 7 months | £1,693 |
| Example 4 | £4000 | 10% | 19.9% | £4,702 | 5 years | £702 |
| Example 5 | £4000 | £250 | 19.9% | £4,620 | 1 year 7 months | £620 |
The reason for the high amount of interest is because the minimum payment is a percentage of the total balance, which means the amount repaid will decrease every month.
Bottom line: Set up a fixed monthly payment with your credit card issuer. Ideally at least 10% of your balance.