Why you shouldn't only pay the minimum

Posted in 'Credit Reports' by Richard Catlin

01 July 2009

The news that Barclaycard is to cut the minimum monthly payment to just 1.5% (or £5, whichever is greater) for thousands of its credit card customers has been met with criticism.

The opportunity to pay less each month might be appealing to many over-stretched consumers right now, but doing so will mean that their overall balance is likely to only creep down by a few pence each month, as any payment is simply eaten up by interest payment. Barclaycard has not announced how many of its customers will be offered the new repayment option, but it will not apply to everyone. Those that are moved to the new rate can request that they remain on the old 2.25% minimum payment rate.

Barclaycard argues that it makes it very clear that making only minimum repayments will significantly increase the time it will take to clear a balance and will cost more and say that the move is aimed at helping cash-strapped consumers through a tricky period.

Despite the outcry, Barclaycard certainly isn’t the first lender to adjust its minimum repayment policies. A number of lenders changed the way they calculated monthly minimums back in November 2008– with HBOS going as low as 1% for some cardholders.

Repaying even a small amount more than the minimum each month will help slash the time it takes to clear the balance. If at all possible, the best thing to do is attempt to shift any balance to a card with a 0% introductory offer. Virgin has offered the longest 0% offer for some time now – 16 months (a 2.98% fee applies), but it is best to check for free first that your credit rating is good enough.

The past few years have seen lenders share an increasing amount of data about their customers, in an attempt to become ‘more responsible’, and reduce the risk of consumers getting into financial difficulty.

In 2006, some of the UK’s biggest banks began sharing data about applicants’ salaries, which when analysed alongside existing credit commitments allowed them to better assess an individual’s ability to meet all of their repayments.

At the end of last year, lenders also started reporting on customers’ monthly repayment habits – especially affecting the estimated 3.5 million UK consumers who only repay the minimum amount each month. Lenders claim that the data is only used for purposes of responsible lending - backed by the Government – critics argue that they also use it as a way of weeding out non-profitable customers, commonly known as rate tarts.

You can check what information lenders hold about you by checking your credit report online. Our Triple Agency Report is the most comprehensive credit report available in the UK –at the lowest price. See how your existing credit agreements are reported and how your balances and limits have changed each month for the past six years.

Order your latest Triple Agency Report.