If you are making the minimum payment to a credit card it will probably feel as though you are only paying interest and the balance isn’t going down. You aren’t alone – in July 2016 new research found that over 1.4 million people in Britain have been making minimum payments for three years or more.
If you are caught in this minimum payment trap, what can you do? Of course it would be best to pay a lot more off your card … but you may not be able to afford this. Or get a balance transfer, that would be mean all your money was paying off the debt not going in interest … but your credit rating may not be good enough to get a balance transfer deal.
So have a look at the four ways changing to making a fixed payment each month can help you.
This approach is for people who have stopped spending on a card and want to clear their debts but are feeling stuck because they don’t have much spare money to do this. It’s not fast, but it really will help and best of all it is very easy.
Why making minimum payments seems to take forever
Paying the minimum to credit cards takes a horrendously long time to pay off a credit card. Most of your payment is just paying the interest, only a little is repaying the money you owe, With many credit cards that repayment amount is set at 1% of your balance per month.
The big problem is that next month, because you will have paid off a tiny bit of the balance, both your interest and the 1% balance part will reduce. So your next payment is small amount lower. You might think that’s good – but it is actually a trap!
If your 1% was the same amount each month, then it would take 100 months – just over 8 years – to repay the debt. You might think that sounds too long, but it’s actually WORSE. Because the 1% drops each month, it takes even longer to reap the whole amount. With many credit cards this can be 15 years – sometimes more than 20 years!
Making a fixed payment gets you out of this trap
If you make the same fixed payment each month, these avoids these sneaky minimum payment calculations. You could fix them right now at what your current payment is by setting up a standing order – that would be a big improvement.
Perhaps you don’t think fixing the payment this way will make much difference compared to paying the minimums?
Have a look at this example (from a moneysavingexpert page). It is a credit card debt of £3,000 at 17.9% interest. A typical minimum payment for this debt would be £71 at the start. This table shows how long it would take to repay the debt if you make the minimum payment all the time (more than 27 years!) and how that drops dramatically (to just 5 years) if you fix your payments instead:
||total interest paid||time in debt|
|minimum (£71)||£4000||27 years 4 months|
|fixed (£71)||£1500||5 years|
Of course if you could round up the current minimum payment, that would mean your debt goes even faster and you pay even less interest. Increasing the £71 payment to £80 would mean the credit card is cleared 6 months earlier.
The four ways fixing payments helps
Making the same payment each month makes your life easier for four reasons:
- it really speeds up your debt repayment so you pay a lot less interest.
- you don’t have to pay any attention to the credit card statements at all, you know how much is coming out of your bank account each month, just like a loan.
- standing orders mean you are in control of what is coming out of your bank account and when. You can use this to simplify your monthly finances. Look at the date you get the statement and a couple of days before the date the payment is due – you can pay the credit card bill any time between those dates. If you are paid in that period, you could set the standing order date to be your payday. Or if you have other debts or payments such as rent, you could pay several of them on one day.
- even if you have a “bad month” you are still overpaying your cards a bit.
What about snowballing?
You may have heard of “snowballing” – pay the minimum to all your debts apart from one, overpay that one by as much as possible (“the snowball”) and watch your debts fall faster each month as the snowball gets bigger. It’s described in detail here. But a few months in and some people find it a hassle to track and find they have less to pay off at the end of the month than they expected.
Fixing the monthly payments to all of the cards except the one you are overpaying, can simplify snowballing a lot. You will have a small amount less to overpay to your target debt – but the other debts are going to be dropping a lot faster. For many people with busy lives, the simplicity of fixed payments can be a big help.
If you are struggling to afford the minimums
If you are desperate to pay less each month because your debts are going up and the minimum payments are more than you can afford, this approach isn’t going to help. Have a look at your other possible debt options.