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Why your card debt could last 40 years | |||||
| The following is an adaptation of an article appearing in The Sunday Times on 24th June, 2007. Credit-card firms are making debt last 30 years longer than necessary by manipulating minimum repayments. And a devious change this week to Barclaycard means customers could have another five years added. So dont be fooled by the innocence of the phrase minimum repayment ; its a danger signal. Confusingly with credit cards, unlike loans or mortgages, the interest cost is separated from the amount that needs repaying. You have total freedom to pay off as much or as little as you like, providing it meets the prescribed minimum. Why minimum repayments are dangerous Designed to look innocuous, possibly even consumer-friendly, the minimum-repayment concept is a powerful anti-consumer weapon that makes debt linger, and linger, while the credit-card firms rake in huge profits. Its all because the minimum is set as a proportion of your outstanding debt, usually 2% or 3%, with a £5 minimum. So while it may seem generous to let us repay a tiny amount a month, it means repayments only just cover the interest, so the debt is hardly touched. And as the amount owed slowly decreases, so does the amount you repay, leaving you permanently indebted and paying interest. If you think Im overegging it, this example may just shock you. Suppose Arthur Sixpence owed £3,000 on a high-street credit card with a typical rate of 17.9%. If he only made the minimum 2% repayments, his hair would bypass the grey stage and go straight to white because it would take him 40 years to repay, at an interest cost of £6,300. Warning: Barclaycard and Marks & Spencer are reducing their minimums The innocuous-looking note in the statements posted to Barclaycard and M&S &More card-holders are actually nightmares. Most Barclaycard customers minimums are dropping from 2.5% to 2.25%. This looks insignificant, but the real impact is huge. I estimate someone owing £5,000 at Barclaycards standard rate, repaying the minimum, will take five years longer to clear the debt and pay nearly £1,000 more interest. The M&S change from 3% to 2.5% has a similar impact. In their defence, these cards are no worse than others. How to fight back The easy solution is to increase repayments, yet many of those paying only the minimum do so because they cant afford to pay much more. In that case, just fix the repayment at its initial level. Lets return to Arthur Sixpences £3,000 debt at 17.9%. As the minimum repayment is 2%, his initial instalment is £60. He should fix his repayments at that level a figure we know he can afford instead of allowing it to fall. If he did fix and this is staggering hed pay the debt off in just seven years at a cost of £2,100 interest, rather than in 40 years at a cost of £6,300, a saving of 33 years and more than £4,000. Making a balance transfer to a cheaper card to cut the interest would help too. Todays market leader is NatWest, offering new customers 0% for 13 months with a 2% fee. (More options are at moneysavingexpert.com/bts). The direct debit dilemma Standard advice is to repay cards by direct debit, ensuring you never accrue a late-payment charge, but unsurprisingly the minimum-repayment option looms large on lenders direct-debit forms. You should, however, be able to ask to pay a fixed monthly sum rather than the minimum expressed as a percentage. Youll need to write this on the form because it isnt normally given as an option. The credit-card firm should honour this request, but do call to confirm it has been acted on. For this and other news items please visit www.debtscotland.com. By registering on the site you will find a host of debt recovery and credit control tools in the free credit resources section. Stephen Cowan, Yuill & Kyle, debt recovery & credit control lawyers, Scotland, 79 West Regent Street, Glasgow G2 2AR scowan@yuill-kyle.co.uk, Direct Dial: 0141-572-4251 www.debtscotland.com, www.ykcreditcheck.co.uk | |||||
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