Minimum payments lower than interest charges on credit cards

Some credit companies have begun to set minimum monthly repayment levels which are lower than the interest charged. This means that with minimum repayments, the balance owed will increase – even with no further spending.

So, what may appear a good thing to innocent consumers is not really. Minimum payments have been on the decrease in the last few years, from 5% of the balance to 2-3% now. With less debt being repaid each month, the banks gain more interest and the balance takes longer to pay off. Result: the banks get more money at the expense of the customer.

In a recent example a customer was asked for a minimum payment of £32 – 2.25% of the balance – but with only that payment, interest added to the next bill would have been £36.05. The next month the minimum payment would have been £31 and the subsequent interest £36.99. This represents a creeping increase to the debt.

It appears that this does not break the banking code, which states that minimum repayments should cover more than the interest, but only over a twelve month period. These repayment minimums represent an interesting interpretation of the rule. There is an independent review underway to see if the rule needs tightening so that minimum payments are more than the interest on a monthly basis.

Although credit card companies calculate interest in different ways, it is a general rule that spending early in a monthly cycle will result in more interest charges. Of course, if the balance is paid off in full and on time every month, then there is no interest at all. Cash withdrawals on credit cards or a non-zero percent balance transfer are exceptions to this rule.

For people who cannot afford to pay off their balance, it is important to pay off as much as possible to reduce interest payments and clear the card debt as quickly as possible.