Credit card customers could face ‘debt sentence’ of nearly 30 years

In the last few weeks, two major credit card providers, Barclaycard and Marks & Spencer Money, have reduced the minimum monthly repayment level on their credit cards.

M&S Money, with a market share of 4.4% has reduced its minimum repayment from 3% to 2.5%, whilst Barclaycard, with a market share of 14.6%, has cut its minimum repayment from 2.5% to 2.25%.

uSwitch.com’s Minimum Repayment Index reveals that, today, 60 credit card providers have set minimum repayments at less than 3%, whilst the industry average is only 2.65%. Some lenders, including Bank of Scotland, Egg and Co-op, all have a minimum repayment of just 2% and, as a result, could effectively be handing their customers a ‘debt sentence’ of nearly 30 years.

Consumers’ debt sentence could be halved to 15 years and interest payments cut by £5.5 billion by increasing repayments on the average balance from 2% to 3% a month

Just over one in 10 card-holders in the UK make just the minimum repayments on their credit card

uSwitch.com calls on the credit card industry to increase minimum repayments to at least 3% for all customers

In the last few weeks, two major credit card providers with a joint market share of 19% - Barclaycard and Marks & Spencer Money - have reduced the monthly minimum repayment on their credit cards from 2.5% to 2.25% and from 3% to 2.5% respectively. The Minimum Repayment Index from uSwitch.com, the independent price comparison and switching service, reveals that the 3.5 million credit cardholders who make just the minimum repayment each month, could face a ‘debt sentence’ of nearly 30 years.

The Banking Code states that minimum repayments should cover at least the interest charged each month. uSwitch.com has found that while some lenders have marginally increased minimum repayments over the last couple of years, the average is still just 2.65%. Disappointingly, 60 card providers have a minimum repayment of just 2% including Egg, Bank of Scotland and Co-Op Bank.

In fact, repaying 3% each month instead of 2% on the average UK credit card balance of £1,812 could almost halve the time it takes to repay the balance, from 29 years and 2 months to 15 years and 1 month. The higher payment also cuts the total amount of interest by a staggering £1,600, from £2,857 with a 2% minimum repayment to £1,256 with a 3% minimum repayment.

Mike Naylor, Personal Finance Expert at uSwitch.com said: “In an environment of rising interest rates where personal debt in the UK has reached a staggering £1,325 billion, of which credit card debt accounts for £54 billion, consumers could now finish repaying their mortgage before their credit card, despite the huge disparity in sums borrowed.

“Despite the introduction of ‘health warnings’ on credit card statements, the implications of making the minimum repayment each month are still not clear enough to consumers. There is little justification for setting minimum repayments at just 2% and we believe that it is time that the industry agreed a standard minimum repayment amount of at least 3% on all credit cards.“

For example, a person borrowing £10,000 on a card with a minimum repayment amount of 3% pays £1,130.60 less interest than if they borrowed half the sum (£5,000) on a card with only a 2% minimum repayment.

Mike Naylor concludes: “We urge all credit cardholders who pay the minimum off their credit card bill each month to think about the amount of interest they’ll end up paying as a result. Not only will paying slightly more each month see the debt paid off much more quickly but it will also result in much less interest too.”

uSwitch.com is calling for:

Minimum repayments to be set at least 3%

Issuers to print clear scenarios on monthly statements that spell out the length of time it would take to repay the balance and interest payable by only ever making the minimum repayment

Abolish ‘rules’ set by some lenders insisting that customers who pay their card bills by monthly direct debit can only do so if they repay the minimum amount or their balance in full: instead allow them to set their own limit