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<p>Paying the minimum on your credit card can seem like the easier option, but are you losing out by doing this? </p>
Unlike other types of borrowing, credit cards give you more control over how much you repay every month. But this isn’t necessarily a good thing. Getting into the habit of paying back only the minimum amount can make you think that you’re on track with your payments, when in reality you could actually be extending the time that you’ll be in debt, as it’ll take you much longer to clear the balance.
Paying just that little bit more
As what you repay on your credit card every month is usually a percentage of the balance, rather than a fixed amount, the minimum monthly repayment will go down as your balance reduces. This means that by only making the minimum payment every month, your balance is not going to go down very quickly, and neither will your repayments.
Although it is important to keep up with the minimum payments … as credit card companies usually charge a fee for not doing so … paying even just a little bit more than the minimum each month can make a big difference to the amount of money that you repay overall and the time it takes to clear your balance.
As an example, if you had a £3,000 balance on a typical credit card with an 18.9% APR, and a £5 minimum monthly payment, it would take just over 27 years to clear the debt, and you’ll pay over £4,170 in interest. But, if you were to make a fixed payment every month of £60, it would only take you 7 years and you would pay £2,392 in interest.
We’ve used Money Saving Expert’s handy Minimum Repayments Calculator, which you can find here, to show the different variations of how long it would take you to pay off this balance without borrowing further:
|Amount Repaid||Time taken to repay in full||Cost of interest|
|Minimum (1% + interest or £5)||27 years and 4 months||£4,170|
|£60/month||7 years and 6 months||£2,392|
|£80/month||4 years and 7 months||£1,365|