Say No To Credit Card Minimum Payments

Many credit card holders who keep to monthly minimum payments think they are in a comfort zone, when in actual fact they are slipping into a debt nightmare.

Minimum payments are what a credit card supplier expects you to pay towards your credit card balance every month. Generally the minimum payment is set at about 2% of the outstanding balance.

The reason credit card companies set their minimum payment requirements so low is due to the fact that credit card holders who always keep to minimum payments make them more profits.

By keeping to the minimum payment cardholders are increasing the time it takes to pay off their debt, which means more interest.

If you had an outstanding balance of £3000 on your credit card and the APR was 15.9% (average) by keeping to the minimum payment requirements it would take you over 36 years to repay your debt with interest of £5254 being charged on the principle of £3000.

By paying an extra £10 each month, over and above the minimum payment, the time to pay off the debt would be reduced to just over 13 years, with the interest paid coming in at £2537.

If you could pay an extra £30 each month, it would take you just over 7 years to repay the balance and the interest charged would be reduced to £1319.

Minimum payments should only be used if you have debts elsewhere which incur a higher rate of interest than your credit card. This is a well-used method when you are in debt to pay off the most expensive debt first.

The banking industry defends its charges

Joanna Elson, executive director of the British Bankers' Association (BBA), was keen to stress that unauthorised overdraft fees were not a penalty but a fee for a service. "The customer has not had the loan agreed. It is not that difficult to arrange an overdraft," she says. "In many cases, the current account provider protects the customer's reputation by not bouncing cheques and direct debits." Ms Elson added that the BBA's own research had shown that UK banking customers enjoyed a better deal than their mainland European counterparts. "In the UK, free banking is a reality in other parts it is not," she argues. "Many people abroad have to pay tariffs for cashing cheques as well as a monthly management fee."

Seymour Fortescue, chief executive of the Banking Code Standards Board (BSCB), which administers the voluntary rules governing how financial institutions treat their customers, told BBC News that reform of charging was necessary. "Disturbingly, the charges fall hardest on people on low incomes, such as students, who can least afford them," Seymour Fortescue, chief executive of the BSCB told BBC News. "What I would like to see is greater transparency over charging," he says. "There should be a summary box on statements outlining all the charges and a 14-day notification period before a charge is imposed. "This should ease the problem of charges being imposed on charges."