May 15, 2006

By Peter Kenny

Many credit card holders who keep to monthly minimum payments think they are in a comfort zone, when in actual fact they are slipping into a debt nightmare.

Minimum payments are what a credit card supplier expects you to pay towards your credit card balance every month. Generally the minimum payment is set at about 2% of the outstanding balance.

The reason credit card companies set their minimum payment requirements so low is due to the fact that credit card holders who always keep to minimum payments make them more profits.

By keeping to the minimum payment cardholders are increasing the time it takes to pay off their debt, which means more interest.

If you had an outstanding balance of £3000 on your credit card and the APR was 15.9% (average) by keeping to the minimum payment requirements it would take you over 36 years to repay your debt with interest of £5254 being charged on the principle of £3000.

By paying an extra £10 each month, over and above the minimum payment, the time to pay off the debt would be reduced to just over 13 years, with the interest paid coming in at £2537.

If you could pay an extra £30 each month, it would take you just over 7 years to repay the balance and the interest charged would be reduced to £1319.

Minimum payments should only be used if you have debts elsewhere which incur a higher rate of interest than your credit card. This is a well-used method when you are in debt to pay off the most expensive debt first.