The Minimum Monthly Repayment Trap & A Lifetime Of Credit Card Debt

A recent growing trend among UK credit card providers is an offer that UK credit cardholders appear to be delighted about – a reduction in the minimum monthly repayment percentage amount that cardholders who carry a balance on their credit cards need to repay.

Amazingly, the past decade has seen the minimum repayment percentage that a cardholder was required to repay fall from 5% to today’s all time low of 2%. However, given that over 60% of credit cardholders in the UK carry-over an outstanding debt balance at the end of each statement period – are we really doing ourselves any favours; or, is the minimum monthly repayment trap consigning you to a life time of credit card debt?

As little as a year ago most UK credit card providers required their members to repay 3% of their outstanding statement balance each month. Today, you’re more likely to find that your UK credit card issuer only requires you repay 2% of your outstanding balance each month. As a UK credit card user, at first glance this may well sound fantastic. After all, now you get to keep more of your monthly salary - as you don’t need to repay the credit card as much! But, if you look at some cold hard financial facts, you may well soon realize that the UK credit card issuers are not doing you any favours whatsoever!

OK, so let’s say you currently owe approximately the national British average amount of £3,000 on your credit card. Your credit card provider has nicely just agreed to reduce your monthly minimum repayment amount from 3% to 2% of the outstanding balance. Looking beyond the fact that you now have more disposable cash in your pocket each month, what does this really mean to you?

Basically, that mere 1% drop in the minimum monthly repayments you had to make has consigned you to an additional 15 years of minimum monthly credit card repayments! What’s more, on a credit card debt of £3,000, that 1% drop in minimum monthly repayments has also meant that you’ll end up repaying the credit card company an additional £2,200 in interest! That’s right, for the comfort of having that 1% drop in monthly minimum repayments, you’ll end up repaying the credit card company almost as much as what you currently owe – over a period of 15 years. Now, if that’s not being consigned to a lifetime of credit card debt, what is?

However, as far as the credit card issuer is concerned, the picture is much rosier. First of all, there is likely to be far less pesky defaulting credit card users - as the minimum monthly repayment is now much more affordable. Secondly, you, as a credit card customer, are much happier – and why not, you feel ‘better off’. But, with over 3.4 million credit card users in Britain electing to only repay the minimum monthly repayment amount each month, the real punch for credit card companies is that drop of 1% per month in monthly minimum repayments is helping them to reap an additional £7.5 billion a month in interest revenue.

Ultimately, however, the choice is yours. You can continue to make those minimum monthly repayments that you’re currently making each month, and thereby possibly consign yourself to a lifetime of credit card debt, or you can up your monthly repayment amounts by a mere 1% each month and end up repaying your credit card debt 15 years earlier, and saving yourself a lot of money in interest payments at the same time.

Richard Smith
28th July 2006

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