The Slowest Way To Pay Down Credit Card Debt
Money owed on credit cards is one of the most common forms of unsecured debt in the UK, not to mention one of the most expensive. Credit card APRs are traditionally much higher than most other forms of borrowing, and this combines with the ease of racking up more debt to lead to many people suffering genuine financial problems caused by careless use of credit cards.
In this light, many people resolve to cut up their cards and never use them again, and begin the long but necessary process of clearing their card balances and becoming free from this expensive debt.
Minimum Repayments
If you decide to do this, there is one thing you absolutely must do if you want to get out of debt any time soon, and that’s to pay more than the minimum repayment amount shown on your monthly statement. If you stick to the amount shown, maybe by automatic direct debt, your debt will hang around for much longer than necessary, and will cost you much much more in terms of interest charges along the way.
The reasons for this are clear when we look at some figures. An average credit card will charge monthly interest of around 1.5% of the outstanding balance, rising towards 1.7% or even higher on some cards with higher APRs. If you compare this to the common minimum repayment amount of around 2% of the balance, it’s clear that nearly all of your monthly bill is being taken up in interest charges, with only a very small amount going towards actually reducing the amount that you owe. This means that you’re really only treading water, and not significantly paying down your debt.
Reducing Payments As You Go?
There’s also another pernicious reason not to pay only the minimum: as the amount you owe goes down, so does the minimum repayment, which will only ever cover little more than the interest charged.
The credit card companies know that this is a very profitable situation for them, which is one of the main reasons why the minimum repayment percentage has fallen inexorably – not so very long ago, 5% of the balance was common, but now 2% or 2.5% is much more likely.
Actually Paying Down Your Debt
The only way to make significant strides in paying off your debt is to pay a little extra each month, over and above the minimum required, and try not to reduce what you pay even as the required amount falls. Even if you can’t afford to increase your payment by much, remember that every bit extra you can put in will go directly towards reducing what you owe rather than paying interest, and will benefit you permanently by reducing the amount of interest you have to pay not just next month, but every month in the future.
This can quickly become a virtuous circle, where the faster you can reduce interest charges, the faster you can clear the balance, and so the less interest you have to pay next month, so your balance falls faster, and….. and so on and so on.
Interest Charges
I wont go into the calculations here, but if you owed £2,000 on a card with an APR of 16.9% and a minimum repayment of 3%, and only ever repaid the minimum, you’d have to wait over 16 years for the debt to be cleared, and you’d have to pay over £1,600 in interest in the process.
If however you chose to pay £60 a month regardless of how much was asked for, the time then to clear the debt would be only a little under 4 years, and you’d pay almost £1,000 less in interest overall.
So, even though making minimum payments may seem attractive if you’re struggling financially, only ever doing so will condemn you to a future filled with debt for much longer than it has to be.
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