How £10 a month could save you £2,000
When I was still too young to have one, I remember credit cards being marketed as 'flexible friends'.
Nowadays, there are an amazing 66 million of our plastic pals in circulation according to the Department for Business, Innovation and Skills (BIS) - yet it's unclear whether our relationship with them is as mutually beneficial as those old ads suggest.
Of all the sneaky practices credit card providers benefit from, I think setting the monthly minimum repayments (MMRs) on customers' accounts too low is the nastiest. This policy can mean even a modest debt persists for decades, costing you thousands of pounds in interest!
Luckily, there is a way to avoid falling foul of this crafty card trick - and it might cost you as little as £10 a month...
The MMR: a true money monster
First, here's a quick explanation of how MMRs actually work.
The monthly minimum repayment is - as its name would suggest - the minimum amount you must pay off your credit card each month to avoid penalty charges.
Years ago, most credit cards came with higher MMRs of up to 10%. If you owed £2,000 on a credit card with an APR of 17% and an MMR this high, you'd have been required to repay £200 a month off your balance - and would therefore have been able to clear the debt within a year.
Unfortunately for credit card borrowers, companies soon woke up to the fact that they could massively increase their profits by reducing their customers' compulsory repayments. Now, some credit card providers (including Halifax Bank of Scotland) set their MMRs as low as 1% (or £5 plus interest, whichever is the greater).
This has had a disastrous effect on credit card customers who only ever pay their provider's MMR. A cardholder with a £2,000 balance on a credit card charging 17% APR and with an MMR like that set by HBOS would have to pay back just £31 a month - a far cry from the £200 required in years gone by.
What's more, despite the relatively small size of their debt, it would take a borrower an incredible 33 years to repay this sum if they stuck with the credit card's MMR - at a total cost of £5,281 in interest.
The terrifying truth
No - I'm afraid those figures weren't typos!
It really would take three decades to clear a credit card debt of just £2,000 if you never paid more than the 1% MMR required by your credit card provider.
The key reason for this is that any credit card's MMR is calculated as a percentage of your total outstanding balance. This means that, as the size of your debt begins to decrease, so will the sum you are regularly paying off it!
I can't say it more plainly than this: low MMRs are designed by credit card companies to trap you into debt for as long as possible.
Even though sticking with a low MMR might seem helpful - especially at a time when many people are struggling - paying it will mean your credit card balance takes you far longer, and costs you far more, to clear in full.
How £10 (or £50) a month could make all the difference
The good news is there's something very simple you can do to save yourself from decades of debt.
By repaying more than your credit card's MMR each month - even if you only overshoot it by as little as £10 - you could cut years off the lifetime of your balance.
In addition, you'll save hundreds, if not thousands, of pounds in interest payments.
Check out the examples below, based on a common MMR of 2% (or £5):
| Credit card starting balance | APR (%) | Monthly minimum repayment | Monthly repayment on top of MMR | Time taken to repay in full | Total interest charged |
| £2,000 | 17 | 2%, or £5 | £0 | 386 months (just over 32 years) | £3,535 |
| £2,000 | 17 | 2%, or £5 | £10 | 122 months (over 10 years) | £1,429 |
| £2,000 | 17 | 2%, or £5 | £25 | 63 months (just over 5 years) | £789 |
| £2,000 | 17 | 2%, or £5 | £50 | 36 months (3 years) | £458 |
As you can see, paying back just £10 a month more than this credit card's MMR would enable a borrower to clear their debt 22 years faster - and save them an amazing £2,106 in interest.
Having said that, an individual who opted for an extra payment of £10 would still take 10 years to get rid of their £2,000 debt.
This repayment period could quickly be chopped in half if the borrower chose to repay £25 a month on top of his or her MMR. This extra cash would also cut the total interest payable on the card by £640.
Finally, it's easy to see the difference paying £50 a month above the MMR would make to an individual with this particular debt. By holding their repayments at this increased level, he or she would clear their debt in three short years and slash the total interest charged on the balance to £458. That's an incredible £3,077 less than it would cost to repay the card's MMR alone!
Clear your credit card quicker!
Hopefully I've now convinced you to think carefully about how much you're paying off your credit cards each month.
Remember, even if you can only afford to pay a small amount above the MMR off your debts every few weeks, this could save you a huge amount of money in the long term.
Don't forget that you could speed up the process of ditching your debts even further by shifting your standard rate balances to a 0% or long term, low rate credit card. Right now, the longest 0% balance transfer deal on the market comes from the Virgin credit card, which offers borrowers 16 months of interest free breathing space and charges a 2.98% balance transfer fee.
You can find out more about how 0% deals and long term, low rate credit cards work by reading this article. Finally, if you'd like some further tips for digging yourself out of debt, you can find seven useful ideas here.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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