Most people pay off their credit cards fairly quickly but one in ten get caught in a cycle of only making minimum repayments. It's bad news!
Credit card companies can be a crafty lot. In the old days you used to have pay at least 5% of your debt off every month but this figure has fallen in recent years - not to help you but to ensure greater profits for the lender.
After all, the longer you take to pay off your borrowings the more interest they'll accrue. Most credit card companies don't spell out the effects of making only minimum payments although Barclaycard has just introduced such information in their literature pointing out that it will take 17 years to clear a £1,000 debt if customers only make minimum payments of 2%.
This is how it works in principle. Let's say you go out and buy a widescreen television for £1,600 using your lovely brand new credit card, which arrived in the post that morning. Credit card companies vary as to when they decide to start charging you interest but let's assume interest will only apply from your statement date.
Your statement, when it arrives tells you that your monthly interest rate is 1.5% (that's an Annual Percentage Rate of 19.6%, by the way!) and that, if you don't pay off the balance in full, you will need to make a minimum payment of at least 2% i.e: £32.
So you toddle off to your computer and transfer £32 to your credit card company.
Your second statement arrives telling you that you still owe £1,592. As you can see, £24 of your £32 has been used towards paying the interest they've charged you in the intervening month - hardly any of it has gone towards paying off the original cost of the £1,600 telly.
Even if you never buy anything on your credit card again, the fact is, if you keep up your system of only making the minimum payments each month, it's going to take you nearly 39 years to pay off that widescreen TV - long after it's probably been consigned to the back of your garage along with all the other stuff that no longer works! And you'll have paid a total of £5,866 for the wretched thing!
The easiest way to ensure that every penny of your monthly repayments goes towards settling the debt itself is to switch the balance to a 0% credit card. Assuming your credit rating is good enough to persuade a card company to take you on, it means that, even if you can only afford to pay small amounts each month, at least your money will be eating away at the original debt.
Bear in mind that, even with a 0% deal, you should always try to pay more than the minimum to reduce the amount of time it takes to pay off. But with so many 0% deals on the market at the moment there's really no reason why you should be paying interest on your credit card debt at all.
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