Just making minimum repayments on credit card balances costs customers thousands in interest and takes over two decades to clear, research has found.
Research from credit experts TotallyMoney and MoneyComms has found only making the minimum repayment each month will take over 26 years to clear a credit card balance, with customers being expected to lose a staggering £3,775 due to interest.
The shocking figures are based on only making the minimum repayment on a credit card balance of £2,604, with a fixed interest rate of 19.9% APR.
Worryingly, the anticipated interest costs will be even greater for those customers stuck with a higher annual percentage rate.
Furthermore, a staggering 80% of people are unaware of the dangerous trap they could fall into by only making minimum repayments, leaving them with debt that will take over a quarter of a century to clear.
Small change, big win
The credit experts advise that one way to avoid this pitfall is by paying a slightly larger, fixed amount each month.
For example, if the first minimum repayment on a £2,604 credit card balance is £66, setting the monthly repayments at this thereafter, while the outstanding balance continues to decrease, could avoid customers from paying an extra £2,367 in interest.
Moreover, this payment plan means it will take just over five years to pay off the balance – more than five times faster than the 26 years it will take to clear the same balance when only making minimum repayments.
“While it’s alarming how much money people can save by making one small change to their repayment habits, it’s even more concerning how many people don’t know how making only the minimum repayment impacts them,” Alastair Douglas, CEO of TotallyMoney, said.
“It’s understandable that in certain months customers can only afford the minimum repayments, and sometimes it may be tempting to make a smaller repayment to keep as much cash in the bank as possible. However, the figures show this is an incredibly expensive option.
“Many will pay even more interest on their credit card balance if they have a higher annual percentage rate,” He added.