Credit card debt could take 31 years to repay

With credit card spending increasing by an average of £179 million quarter to quarter in the last year, a drop in the average minimum repayment could spell more bad news and extra debt for consumers. In the last 12 months, the Minimum Repayment Index from uSwitch.com reveals that the average repayment required has fallen from 2.65% to 2.54% (-0.11%). With over one in ten credit card holders (11%) making the minimum repayment each month, this small reduction could make providers an additional £437 million in interest.

In the last year two providers, Citibank and Clydesdale Bank, have reduced the minimum repayment required on their cards from 3% to 2.25% (-0.75%) and 3% to 2.5% (-0.5%) respectively. Again, this may seem like a very small change but a decrease of just 0.25% can increase the amount of interest paid by almost £800 and stretch the term by an extra seven years.

The Index also reveals that the 3.4 million credit card holders that make the minimum repayment of 2% each month on the average balance of £1,384 could take 31 years to repay the debt. During this time, these consumers will pay over £9.6 billion of interest collectively or £2,829 each. Increasing this payment to 3% each month could more than halve this to 14 years and 9 months. The higher payment also cuts the total amount of interest by 60% (£1,704) to £1,125.

uSwitch.com has found that almost 40% of all credit cards require a minimum repayment of just 2% or £5 each month. Overall, 64% of credit cards have a minimum repayment of 2.5% or below, just 6% look for 4% or more. The Banking Code states that minimum repayments should cover at least the interest charged each month but this doesn’t go far enough to protect consumers from a debt sentence that exceeds the length of the average mortgage of 25 years. By not exceeding the monthly interest incurred, consumers are repaying very little towards the outstanding balance.

To set this in context, consumers who purchase holidays on their credit card and proceed to make the minimum repayment of 2% each month will pay far more than they need to. For example, flying to Beijing for six nights would cost an average of £739. However, by paying for this on a credit card and making the minimum repayment would take 22 years and three months to pay back. Interest will total £1,324 – almost double the cost of the holiday. Flights and a seven night hotel stay in New York would cost £2,532, this increases to a staggering £8,039 if just the minimum repayments are met every month at the lowest rate of 2%. This means the interest for the holiday would total £5,507.

However, increasing the minimum repayment by 1% to 3% could more than halve the interest paid by consumers. For example seven nights at a Parisian hotel via Eurostar from London to Paris would cost an average of £1,159. If this was paid for using a credit card at the minimum repayment level of 2% it would take a consumer 28 years and six months to pay off, with interest totalling £2,304.00. However at a minimum repayment level of 3% the interest decreases to £927.70 – less than half.

Simeon Linstead, head of personal finance at uSwitch.com, the online price comparison and switching service, comments: “Over the past year we have seen an increase in credit card spending, making minimum repayment levels more of a problem now than ever before. With the cost of living on the up and people being forced to tighten their purse strings, consumers will be more tempted to just make the minimum repayment on their credit cards and spend the cash on more pressing bills. However, as our research has revealed, those that opt to manage their credit card debt in this way could end up paying far more than they need to for every purchase made. This type of repayment barely touches the balance and in the majority of cases just covers the interest incurred.

“Sending a small monthly payment to the credit card company may seem like a good idea at the time, however this is an expensive lesson in term. We urge the credit card industry to set all minimum repayments at 3%, we have long been calling for this, and it is long overdue.”

For more information visit uSwitch.com