The minimum payment trap - M4Money Credit Union

While it seems like you can get the freedom and flexibility with a credit card, especially for large purchases, there is one thing to watch out for, the minimum payment trap.

Every month, when you get your credit card bill, you notice a “minimum payment” amount displayed next to your outstanding balance. This amount always seems low to begin covering all the charges that have accumulated that month, let alone the balance that was carried forward from the last statement. You wonder, “Why would my credit card issuer be happy with a payment of £15 on a £1,700 bill?”

Here is what you know about minimum payments and how to avoid them.

What does minimum repayment even mean?

This is the minimum amount that you would need to pay each month so that you can avoid additional fees, charges or interest that affect your credit score. It is calculated based on your card balance, so it will go up and down depending on the total amount you owe.

A typical minimum repayment will be around 1-2.5% of how much you owe (usually including any interest or charges, such as late fees) or £5-£25, whichever is higher. A lender’s rule might say something like:

“Greater of 1% of balance plus interest or £5”

Why is called a ‘minimum payment trap’?

The issue starts when people treat the minimum payment more as a monthly fee than as an option.

It looks tempting to pay the smaller amount of your bill. Even if you stop spending on that card, and keep paying the minimum amount each month but if it seems like you will never get the bill paid off, you are probably close to being right.

Paying only this amount stretches repayment over months or even years while the interest increases continuously.

It’s a trap that is easy to get into but harder to get out of.

Here is an example of a minimum payment versus an extra £15 payment.

You want to buy a sofa that costs £850. You use your credit card where the annual interest rate is 20%. Your minimum payment plan is £15 each month and 3% of the outstanding balance.

See the table below to show the difference between the two options (the minimum payment plan versus the £15 payment.

If you pay an extra £15 each month or £30 total, you would have saved:

Interest: £558 – £273 = £285

Total debt: £1,408 – £1,123 = £285

How much quicker would you have paid off your total debt? 3 years 8 months

Tip: You can use tools such as the MoneySavingExpert minimum payment calculator to see how you would need to pay back using a minimum repayment plan.

How to avoid being caught up (and stuck) in the minimum repayment trap

With some planning, you can get out of the ‘minimum payment trap’ and get back on track with paying it all off.

Here are some tips:

1. If you can, pay off as much debt as you can each month. As you saw from the example above, the quicker you pay off your balance, the less you spend on interest.

2. If your situation changes and you genuinely can’t afford to pay back above the minimum, contact your card provider. They can help you find a solution such as pausing the interest for a set time; converting the card into a loan; or offering a repayment holiday.

3. If you have a strong credit record, you could be eligible to take out a consolidation loan to help you clear out the credit card debt.

If you are still having debt issues, visit the Debt Free London website for free professional advice. The team can be contacted via phone or WhatsApp on 0800 808 5700, via video call or in-person at an advice centre. You don’t have to suffer in silence.