Beware of the minimum payment trap

Caution: If you borrow £3,500 at 21, you’ll be almost 50 years old by the time you clear that debt. Just making a minimum repayment on your debt could keep you in debt for years.

This is because you have been caught in the minimum repayment trap.

What is the minimum repayment and where can you find it on your credit card statement?

This is the minimum amount that you would need to pay each month so that you can avoid additional fees, charges or interest that affect your credit score. It is calculated based on your card balance, so it will go up and down depending on the total amount you owe.

Look for a ‘Summary Box’ on your credit card statement which should contain the minimum repayment for your card. It usually looks something like “Greatest of 1% of balance plus interest, 2.25% of the balance or £5”.

Failure to pay on time usually results in a fee and, worse, a missed payment marker is added to your credit report, which can damage your score and ability to get future credit.

What is the minimum payment trap?

If you have kept up with all your monthly payments and even stopped purchasing with that card but it seems as though the debt isn’t getting paid off, you may have been caught in the minimum payment trap.

The minimum payment is usually 2–5% of the balance due. Paying only this amount stretches repayment over many months or years while interest (often 18%–20% or more) continues to add up.

Here is an example of a minimum payment versus an extra £15 payment.

You want to buy a sofa that costs £850. You use your credit card where the annual interest rate is 20%. Your minimum payment plan is £15 each month and 3% of the outstanding balance.

See the table below to show the difference between the two options (the minimum payment plan versus the £15 payment.

If you pay an extra £15 each month or £30 total, you would have saved:

Interest: £558 – £273 = £285

Total debt: £1,408 – £1,123 = £285

How much quicker would you have paid off your total debt? 3 years 8 months

Tip: You can use tools such as the MoneySavingExpert minimum payment calculator to see how you would need to pay back using a minimum repayment plan.

How to avoid the minimum payment trap

Make a fixed repayment based on what you can afford rather than allowing the repayment to decrease each month.

Pay off as much of the debt as you can. The quicker you pay off your balance, the less you spend on interest.

If you have multiple cards and loans, always pay off the most expensive ones. If you have a good credit score, why not consolidate all your debts into one loan and repay that?

If you are still having issues with debt,  some of the services that you can turn to include Money Advice ServiceDebt Advisor ServiceStep ChangeCitizens Advice Bureau to name but a few.