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Credit Cards

Post by BASEL » Thu Mar 27, 2008 10:15 pm

Credit cards - 3 nasty repayment traps

By Sarah Modlock

However religious you are about making credit card repayments, unless you pay off a large chunk of cash or repay the balance in full every month you are likely to be building up more and more debt. Here are three traps to avoid if you want to ensure that your card repayments have the maximum impact....

1) The 'most expensive debt first' trap

Your credit card bill may include several different types of debt. There could be the money and interest you owe for purchases, for cash withdrawals and for any balance you have transferred from another card. You may think that as you are using the same card for each you will be paying one rate of interest. Unfortunately, with most card issuers, this is not the case. To make matters worse, the card company will not use your repayments to reduce the most expensive type of debt on your card.

For example, if you have transferred a £2,000 balance onto your card at 0% and then withdrew £100 at 28% and spent a further £1,000 on purchases at 15.9% your monthly repayment will usually be used to pay off the transferred balance, leaving the interest to build up on the cash withdrawal and purchase balances. This practice allows card companies to make as much money from you as possible.

Research from price-comparison site reveals none of the main eight credit card providers allocates repayments to the most expensive debt first, costing customers dearly. These lenders include RBS, Barclaycard, MBNA, HBOS, HSBC, Lloyds TSB, Capital One and Egg - which account for 87% of the lending market. One card issuer stands out as giving borrowers a fair deal - Nationwide clears your most expensive debts first. The building society is campaigning to bring this to the attention of all credit card users in the UK as it believes that other provider's policies are unfair to customers. Along with a fair order of payments, a Nationwide credit card provides commission free purchases abroad.

Avoid the trap... by using two different cards for balance transfers and purchases. Avoid using your credit card to make cash withdrawals unless it is a dire emergency. Not only are you likely to be charged a very high rate of interest, but you will incur other charges such as a handling fee. You also start accruing interest immediately.

2) The 'direct debit' trap

It makes good sense to set up a direct debit for monthly credit card repayments. Although the card issuers have now been forced to cap late payment fees at £12, these can easily be avoided by setting up a regular payment that will clear your account in plenty of time.

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There is a down side to direct debit though. Most lenders present you with a direct debit form which is pre-filled for the dreaded minimum payment (covered in 'Trap 3', below) or agrees to pay the entire balance in full, which you may not be able to afford.

Avoid the trap... by entering in the fixed amount you can afford every month. Once the forms have gone off, check with your card issuer to ensure they have accepted it. If they do not then pay the minimum by direct debit every month and then make an additional payment by cheque, cash or bank transfer to reduce your debt as much as possible as soon as possible.

3) The 'minimum repayment' trap

If you only repay the minimum on your credit card bill each month then you are not alone. But you could still be paying it off in 40 years as the tiny payments barely reduce the interest you owe, creating a debt cycle. In most cases, just paying a few pounds more a month can dramatically cut the overall time it will take to clear your debt and save money. For example, on an average balance of £2,950.82 a consumer would pay £2,200 less in interest if they repaid 3% rather than 2% each month, and they would repay the full debt almost 15 years earlier.

Figures from comparison site uSwitch show that paying as little as an extra £1 a week on top of the minimum monthly repayments required by the lender - typically between 2% and 3% of the outstanding balance - can reduce the time taken to repay the balance by 13 1/2 years, and save each cardholder £1,247. But as credit card debt reaches £56bn, the average minimum repayment requirement set by credit card providers has fallen from 2.62% to 2.49%. Currently seven out of ten credit card providers have their minimum repayment requirements set at less than 3%, and more than a third are set at just 2%.

The firm's research also looked at how much more expensive it would be to borrow on a card that only requires a minimum monthly repayment of 2% of the balance, as opposed to 3%, for those people who only ever make the minimum payment each month. uSwitch found that the total interest repayable more than doubles when comparing cards where only a 2% monthly repayment is required with those that stipulate a 3% minimum payment, and the balance will take nearly twice as long to repay.

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However, some providers have started to make moves to encourage borrowers to repay more than the minimum each month. Capital One wrote to cardholders in the new year saying they would increase minimum payments for anyone who was not reducing their card debt. Barclaycard has introduced a Flexi-Rate credit card which offers a lower standard APR of 9.9% (compared to 16.9%) for people repaying 10% or more of their balance each month. However, the floor on their standard minimum repayment requirement is still just 2.25% - a level that would like to see raised to at least 3% industry-wide as part of its campaign.

"Our investigation has found that the total interest repayable more than doubles, and the balance will take nearly twice as long to repay, when comparing cards where only a 2% monthly repayment is required rather than a 3% minimum payment," says uSwitch's Nick White.

In addition to the 3% minimum, is calling for card issuers to print clear scenarios on monthly statements that spell out the length of time it would take to repay the balance by only ever making the minimum repayment. They also want to abolish lenders' 'rules' that insist that for customers who pay their card bills by monthly direct debit can only do so if they repay the minimum amount or their balance in full: instead allow them to set their own limit above the minimum requirement.

Avoid the trap... by paying by direct debit every month (as described in 'Trap 2' above) and then make an additional payment by cheque, cash or bank transfer to reduce your debt as much as possible as soon as possible. Put reminders in your diary, calendar or mobile phone - or all three - every month. You may find the tables below help to focus your mind.



Rate (APR)

Min repayment

Years to repay / total payable

Vanquis Bank

Abacus Visa


5% / £5

13 years 2 months £4,266.01

Capital One

Classic Visa


5% / £5

11 years 9 months £3,789.57

Co-operative Bank

Advantage Visa


2% or £5

37 years 4 months £6,512.76

British Airways American Express

Card Amex


2.5% / £5

21 years 4 months £4,190.41

First Direct

Credit Card Visa


3% / £5

16 years 1 month £3,534.40

Nationwide BS

Classic Visa


3% / £5

16 years 1 month £3,534.40 - the money search engine

Table illustrating the effect of varying minimum repayment amounts on interest and repayment periods

Minimum Repayment Amount


Amount Borrowed

Total Amount Repayable

Total Interest Paid

Time to Repay






31 years 11 months






25 years 10 months






21 years 10 months






16 years 11 months

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