Credit Card Minimum Payments – The True Cost OF Living On The “Never Never”

The most unfortunate thing with making a purchase on your credit card is that at some point you are going to be asked to repay the debt incurred. Now, when the statement arrives you’ll have 3 repayment options:

(i) repay the entire balance;

(ii) repay a sum of the balance, but not all; or

(iii) make the minimum repayment required.

If you elect to go with option (iii), you have just entered the world of financial hardship and never ending debt. Why, because making credit card minimum payments means you’ll be living on the “never never” forever and the true cost of having this debt will shock you and possible even financially ruin you.

Compound interest

The principal reason why making credit card minimum payments is the financial equivalent of entering a black hole that sucks up all of your money is because of compound interest.

Compound interest is where you are charged interest on interest. So, for example, if this month I elect to make the minimum repayment, then next month’s interest charge on my credit card statement will include the interest charged on my balance for that month, plus interest charged on any interest I didn’t pay last month. As you can see, it doesn’t take long before this becomes a spiral of debt you can no longer afford to manage.

The minimum payment

Most UK credit card issuers require their members to make a minimum repayment of between 2% and 5% of the outstanding balance on the account on the issue date of the statement. Industry norm is also that the minimum payment be no less than £5 in circumstances where you have an outstanding balance on which less than £5 interest is charged.

The financial black hole

So, if you are making the minimum repayment, you may be just about covering the interest that is being charged on your credit card account each month. You may also be able to pay the fees that are being charged. But it is very unlikely that you’ll be making any repayment of the principal outstanding debt amount. This will have 2 main effects on the future of your financial stability:

(a) you’ll be throwing hard earned money away on interest payments that will never get any less because the principal debt never gets reduced; and
(b) you’ll be at the mercy of interest rate fluctuations because if interest rates rise as dramatically as they did in the late 1980s you’ll likely find that you cannot repay even the interest.

The solution

If you are having problems making repayment of your credit card debt, then one solution is to transfer the balance of your credit card to a 0% balance transfer credit card. Once you have done this, all of the amount you are repaying should go to reducing the principal debt amount. This way you should be able to repay your credit card debt faster and a solution to your nasty credit card minimum repayments problem should be on the horizon!