Card companies change minimum payment rules

Posted in 'Personal Finance' by Richard Catlin

05 November 2008

Many of the UK’s leading credit card providers are adjusting the way that minimum payments are calculated on outstanding balances, which they claim will make it easier for some people to reduce their overall debt.

Until now, minimum payments were generally worked out to be a set percentage of any outstanding balance (as long as it was within the credit limit) of between 2 – 3%. This meant that in most cases, customers only making minimum payments would barely make a dent in their debt, as the repayments only just covered the monthly interest.

Now, some card providers have introduced a new structure, which they claim will ensure that a proportion of the outstanding balance will always be paid off. For some people however, it might end up costing more in the long run.

MBNA, one of the UK’s biggest card issuers, has moved from charging 3% of the balance or £5 plus interest and charges to the greater of £25 or £5 plus interest and any charges. This means that many people who have taken advantage of 0% introductory offers on balance transfers or purchases will be required to pay much less each month than they would have previously. Once the introductory period ends however, this will leave a higher balance on which interest will be charged at the standard rate.

HBOS, with around 4 million cardholders, has also reduced its minimum payment requirements - to as little as 1% of the outstanding balance or £5 plus interest, fees and any insurance premiums. The troubled bank claims that this will help those who incur higher charges on their account, again ensuring that at least some of the overall balance will be paid off.

Switching a credit card balance to a new card is a great way of clearing it early. For many people, introductory offers such as the Virgin MasterCard, which offers 0% for 14 months (a 2.98% fee applies) mean that any payments you make will go towards clearing it, rather than interest payments.