The Dangers of Minimum Monthly Repayments

In the UK there 32 million credit card holders and according to banking payments group APACS, the majority choose to clear their balance in full each month.

However, there is an ever-increasing minority who use their credit card as a means of borrowing and opt to pay just the minimum monthly repayment (mmr) to the credit card balance each month.

Financially, paying only the monthly minimum repayment can prove disastrous for one’s finances.

Firstly, failing to clear your credit card balance each month results in the balance being subject to interest rates of, on average, 15% APR. Considering the Bank of England’s base rate is 4.5% a year and unsecured personal loans can be had with interest rates of around 6%, this is by no means one of the most prudent methods of credit.

Secondly, making only minimum monthly repayments results in hardly any of the debt being paid off as the minimum repayment is swallowed up by the interest and other charges accrued that month. This can result in paying back three times what you borrowed on your card in interest alone and taking up to 30 years to pay off the debt.

What starts off as a small debt can mushroom into something much larger, and the problem may grow as more credit card providers lower the minimum monthly repayment for their cards on order for debt to grow and balances to increase in order to make more from interest.

Figures from online comparison site, Moneyfacts, reveal that:

• Only four credit cards had an MMR of 5%: the Capital One Classic Visa, the Coutts & Co. Classic Visa, and two Visa cards issued by First Trust Bank (NI).
• Only the ASDA MasterCard had an MMR of 4% (minimum £4; for all other cards, this was £5).
• 39 credit cards had an MMR of 3%, including various credit cards from the major providers such as American Express, Barclaycard, Capital One, First Direct, Halifax, HSBC, Marks & Spencer Money, Sainsbury's Bank and Tesco Personal Finance.
• 10 cards had an MMR of 2.5%, four from Bank of Ireland (GB), two from Bank of Ireland (NI), three from the Post Office and one from Sky.
• 26 cards had an MMR of 2.25%, all issued by MBNA or Royal Bank of Scotland/NatWest.
• 49 cards had an MMR of an almost irresponsibly low 2%, including cards from The AA, Barclaycard, Cahoot, Co-operative Bank, Egg, Goldfish, Halifax, Lloyds TSB, Marbles, Morgan Stanley and Smile.

Alisdair Milton
17th July 2006

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