Consumers have been warned by one price comparison website that only paying the minimum amount on a credit card balance each month could lead to an increased debt sentence.
According to uSwitch, those borrowers who choose credit cards over cheap loans - and opt to only pay off the minimum amount each month - risk extending the time it takes to repay debt by up to 30 years. The warning follows news that both Barclaycard and M&S Money have dropped their minimum payment amounts to less than 2.5 per cent.
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Barclays is currently asking customers for a monthly installment of 2.25 per cent, down from 2.5 per cent, while borrowers with M&S Money credit cards can pay as little as 2.5 per cent a month, down from three per cent. Incidentally, the price comparison service suggests that to help negate debt management problems, the credit card industry should introduce a minimum repayment limit of three per cent.
There is little justification for setting minimum repayments at just two per cent and we believe that it is time that the industry agreed a standard minimum repayment amount of at least three per cent on all credit cards, said uSwitch personal finance expert Mike Naylor.
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He added that despite moves to put health warnings on credit card statements and to make literature easier to understand, the majority of borrowers still do not comprehend the problems associated with only paying the minimum amount each month. Mr Naylor suggested that by only paying off credit card debt in small amounts consumers could end up paying off mortgages and secured loans before clearing card balances.
In an environment of rising interest rates where personal debt in the UK has reached a staggering 1,325 billion pounds, of which credit card debt accounts for 54 billion, consumers could now finish repaying their mortgage before their credit card, despite the huge disparity in sums borrowed, he elaborated.
uSwitch research found that 3.5 million Britons could spend 30 years struggling with debt management if choosing to only make minimum repayments. However paying a little more each month could see borrowers cut their debt sentence by 15 years and generate collective interest savings of 5.5 billion pounds.
Figures released today by the British Bankers Association (BBA) suggest that borrowers are slowly beginning to turn away from credit cards and seek out cheap loans for their financial needs instead. Lending on plastic fell by 0.1 billion pounds over the course of June, the association revealed, while personal loans remained popular. Borrowing on loans and overdrafts was up by 0.1 billion pounds last month and secured loan lending grew by an underlying 5.1 billion pounds.
Meanwhile, Toby Clark, senior finance analyst at Mintel, recently said that Britons are wildly underestimating how much money they owe on credit cards and personal loans. The expert was speaking after research from the firm revealed that 21 million consumers owe 100 billion pounds more than they estimate.
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Low Minimum Credit Card Payments Lead To Debt Sentence