Reduced Monthy Repayments On A Credit Card.

With the banking giant Halifax/Bank of Scotland slashing the minimum monthly repayments on their credit cards products, is this really the boost a credit card holder needs, or will card owners end up paying a good deal more for their credit card purchases?

This will not be of a great concern for a credit card holder who pays their balance off at the end of each month. However, for those who make frequent credit card purchases and who usually pay the minimum monthly payment, then it may be time to sit up and pay a little more attention to how paying just your minimum monthly repayment (MMR) can become very costly to you.

How Much Were We Repayng?

Nowadays MMR’s are much lower than they were ten to twenty years ago, before the influx of big US based credit card companies - and with the likes of MBNA and Capital One entering the UK credit card arena, MMR rates have fallen from around 10% to 5% almost overnight.

Over the last few years, these rates have dropped even further to around 2% to 2.5%. So, for consumers who make a number of credit card purchases and who are looking for a credit card with low repayment rates, this seemed ideal. However, the reality is that credit card providers make much more profit from charging lower MMR on outstanding balances.

How Much Are We Repayng Now? 

The lower the minimum monthly repayment of a credit card, the more the card holder ends up paying in interest - and the longer it will take to pay off the outstanding balance from their credit card purchases.

The Bank Of England has recently confirmed that the UK credit card debt is currently running at around £55 million pounds - and with 75% of this debt being interest driven at an average rate of 16.5% APR - it comes as no surprise to learn that UK card holders are paying a staggering £7 billion a year in interest.

So unless you are going to pay off your credit card balance each month, it may well be a good idea to know what MMR you are being charged each month and how long it will take to pay your balance off. You may get a bit of a shock.

HBOS - Reduces Its MMR

As of 1st October 2008, HBOS - whose brands include Bank of Scotland, Birmingham Midshires, Halifax, Intelligent Finance and Sainsbury’s Finance - informed its customers that their MMR would be reduced from 2% - to the greater of:

1. 1% of the outstanding balance; or

2. an amount equal to the interest and insurance premiums charged, plus any penalty fees, plus £5.

However, almost all standard HBOS-issued credit cards charge an interest rate of more than 1% a month (12.68% APR). Thus, almost all customers will pay the second amount, which consists of all new charges to the account plus £5.

What this actually means to consumers with a credit card from HBOS is that they will only repay £60 of their debt each year.  Put in even simpler terms, a £2,500 outstanding balance on a credit card will take the better part of 40 years to repay.

Whereas reduced MMR payments might offer some relief for consumers who are feeling the affects of the current economic climate  in the short term, the long term reality is that deferring the repayment in this way will cost the consumer so much more that it becomes potentially unviable.

Getting The Best From MMR.

Then again, this is great news for those people who transfer there balance between credit card companies. By taking advantage of 0% intrerest deals, they are able to avoid paying interest by switching between 0% credit cards. A great way to reduce their minimum monthly payment by 50% from 2% to 1%.

by Luke Carter