Credit card companies love to get every last penny that they can and offering a minimum monthly payment amount helps them more than you might think. We explore why.
For many people, a credit card provides a vital vehicle to fund their monthly living, for others it offers the opportunity to buy those little extras.
However they are used, many people do not pay off their credit card balance each month.
Whilst some might pay off a significant amount of the outstanding balance, many default to just paying off the minimum monthly payment as defined by the credit card company.
What does this mean in reality?
Looking at an example credit card statement, it happens to be NatWest but for purposes of this article will be fairly typical of mainstream credit cards, it defines the Minimum Repayment as
– Each month, the greater of 2.25% of your balance (rounded down to the nearest pound) or £
Let’s work through an example to understand what this means.
If the credit card balance is £500, the minimum repayment would be approx £11.
This might not seem too bad at first glance but just think of the cost over the year. On top of that there’s the 16%+ interest to be added to the outstanding balance.
Critically by only making payments at the rate of just over 2% per month it’s really not going to help you clear your credit card debts. You are though nicely contributing to the credit card company income!
A number of credit cards, including the Virgin credit card, offer a period of 0% interest on balance transfers and purchases.
You might find our review on the benefits of the Virgin credit card useful to check out.
Whilst a 0% deal lasts, just making the minimum monthly payment maybe fine.
But, for any credit cards on which you are liable for interest, you really need to try and maximise the amount you pay off, avoiding just the minimum monthly payment if at all possible.