Thursday, July 25, 2024

Clearing credit cards takes longer than you think

Do you know how long it would take to pay off your credit card debt just using minimum monthly repayments?

Money website asked 2,000 people how long it would take to clear a £1,000 credit card balance when only making the minimum repayment, typically 2.5% of the money owed. The interest rate was set at 18% APR.

The correct answer is a lengthy 17 years, amassing a huge £1,200 in interest – more than double the original spend. However, more than half (55%) thought it would be less than 10 years. Astonishingly only six people knew the right answer.

Why minimum repayments matter

You might think that as long as you’re paying something back each month you’re doing exactly just what you need to clear your debt. But as the survey shows, the longer you are paying off your card, the more cash you’ll be charged in interest.

Minimum repayments are a percentage of the total debt, so the amount you actually pay each month reduces as you clear the total debt. So you’d start paying say £25 and that would gradually reduce each month.

A better option is to pay back as much as you can afford as a fixed amount. For example, if you were paying £25 a month you’d clear it in just under five years and pay £470 in interest.

 Double that to £50 and it would take two years to pay off and cost £179 in interest.

Another way to clear the debt

It is possible to transfer the balance of your credit card to another credit card and pay zero interest. This will give you a limited amount of time to clear the debt without racking up more and more borrowing in the form of interest.

Balance transfer credit cards also come with a fee, normally a percentage of the total you move across. Generally, the longer you want the 0% period to be, the higher the fee, so work out if it doesn’t ultimately cost you more to transfer than the original interest charges.

Reducing the rate of interest

If you can’t get a 0% balance transfer card, or they don’t last long enough for you to have the opportunity to pay off the debt, you might want to consider a low-APR card. These usually charge a lot less in interest than standard credit cards so it’ll cost you less and you’ll clear the debt quicker than sticking with your existing credit card.

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