Credit cards are very useful or very problematic, depending on your attitude to using them.
Now, hundreds of thousands of us will see the minimum repayment on our credit cards rocket to £25; this could hurt many of us already struggling to repay our debts.
In October, if you are an Alliance and Leicester credit card customer, you will see your minimum repayment terms switch from the lesser of 3% or £5 plus any interest charges to the greater of £25 or £5 plus any interest charges.
While any move that reduces the size of your underlying debt is a good one, the hike will worry many of you whose budget doesn't stretch immediately to such levels.
The changes will chiefly affect those of you with 0% credit cards who have been paying the £5 minimum but now face a huge jump to £25, and those of you with smaller credit card balances.
Unfortunately this means that those of you in lower-income households in careful control of your finances could find your monthly repayments rise to unmanageable levels.
Cash strapped customers
Sean Gardner at price comparison site Moneyexpert.com said that this is not good news:
'Such a move could cause problems with people who are managing their debt carefully, especially when everybody's income is so much tighter. And because people are becoming more stretched, an increasing number are now paying back the minimum.'
MBNA, the credit card company that provides A&L with its cards, will roll out the same changes to other lenders it supplies, including Virgin Money and its own-brand customers.
But although the higher £25 minimum repayment could cause a few of us a measure of financial distress, the greater monthly sums will chip away faster at our outstanding debt and slash the overall amount of interest needing to be paid.
7 reasons why you should use your credit card for everything
Why not compare other credit card deals to see if you could get a better deal?
In debt for decades
Repaying credit card debt by spending just the minimum amount each month (usually 2.25% of the outstanding sum) can leave you in debt for decades. Yet about 3.38 million of us make only the minimum repayment, compared to 20.9 million who repay their credit card bill in full.
Finance website Moneynet.co.uk shows that if you have the average UK credit card balance of £1,384 at 18.9% and make the the 2.25% minimum repayment each month, it will take you a staggering 27 years and eight months to pay it all off!
Worse, you would pay £2,673 in interest charges!
Spokesman Andrew Hagger commented on this crazy situation saying:
'Imagine someone told you that your £1,384 purchase would cost you a total of £4,057 (including interest) and would take you nearly three decades to repay, you would think you'd be mad to entertain such a buy. But because consumers don't appreciate the real cost of their credit-card spending with low minimum repayments, many will just carry on regardless.’
This kind of danger stems from the credit card lenders' allowing us all to to pay a tiny percentage of the outstanding debt each month, rather than sticking to a set payment that eats into the underlying amount owing. This way, interest can continue to build up in the bank's coffers as the debt is slowly eroded over many years.
Minimum repayment madness
For those of you owing thousands on a credit card, the minimum repayment trap can get ludicrously expensive.
According to consumer revenge website Moneysavingexpert.com, a £3,000 debt at 17.9% on a 2% minimum repayment (£60 in your first monthly payment) would take you 41 years to pay off and cost you £6,400 in interest alone.
Need help with your debts? Check out our debt section for advice and debt management solutions.
Debt charities, (which have seen record numbers of heavily indebted individuals get in touch for advice on coping with their borrowing) are recommending that you pay more than the minimum, even if it is just a few extra pounds each month.
Take that same balance of £1,384 at 18.9% and minimum repayments of 2.25%: if you made the minimum repayment and an additional £10 each month, the time taken to repay the debt would shrivel by 20 years to seven years and eight months, and you would pay just £890 in interest charges, Moneynet's research shows.
A mug’s game?
Frances Walker at the Consumer Credit Counselling Service (CCCS) debt charity said:
'It can make such a massive difference, and so we always advise people to pay over by a slight amount, even if it's just a couple of pounds. The real problems begin if you've more than one card and you are paying the minimum on both; you can get locked in for years and years. It really is a mug's game; you absolutely need to clear as much as possible.'
Only two card lenders (Capital One and Coutts, the private bank) insist on a 5% minimum repayment, and the Capital One 'Classic' Visa card carries a monster 34.9% APR!
As a rule, you should pay off the most expensive credit card debt first if you have more than one, and (if possible) try to shift your existing debt to a new card that offers a cheap balance-transfer deal.
Use our Defaqto credit card calculator to get a great deal on balance transfers.
Another option is to set up a direct debit to ensure you never miss a credit card repayment (this costs you a £12 fine) and then make overpayments by telephone or direct from your current account each month.
Sources of free debt advice include: