NestEgg credit card payment tips

Credit cards: avoid the costly minimum repayment trap.


Are your credit card repayments costing you more than the price of a fortnight in the sun?

At NestEgg, we’re big fans of responsible consumer lending. Some organisations warn against credit card spending but we understand that using credit cards can help people achieve some of life’s bigger purchases. From essentials like household appliances or DIY projects to the nicer things in life like a week in the sun or a relaxing city break, affordable credit opens up more options for households. Spreading the cost of these larger purchases makes them more accessible, without the need to save in advance.

Avoid the minimum repayment trap

However, unlike other types of borrowing like mortgages or bank loans, credit card spending comes with two big caveats:

  1. Don’t fall into the costly minimum repayment trap.
  2. Make sure you’re getting the best credit card rate on the market, for your current credit status.

When you make a purchase on your credit card, it’s different from repaying a bank loan or mortgage. You don’t have set repayments each month and a constantly reducing balance. You’re encouraged to make minimum repayments each month, usually set at around 1-3% of the balance or £5 – whichever is highest. Often whilst continuing to spend on the card with ever-increasing credit limits. Sounds great on paper. Small manageable repayments, more disposable cash to spend or save that month, and access to affordable credit when you need it.

But what if that credit wasn’t as affordable as it seems?

The reality is, if you only repay the minimum payment set by your credit card provider, it can take decades to repay, and cost you thousands of pounds in the process. The most cost effective way to use your credit card is to pay the balance in full each month, therefore avoiding interest charges and a lengthy repayment period. Especially true to consumers on a higher APR credit builder card. Yet, for many households, repaying in full isn’t feasible.


Fixed credit card repayments

If you can’t manage to repay your credit card balance in full each month, fixing your repayment can shave years, even decades off of your repayment period and save thousands of pounds in interest. In short, the faster you repay the balance, the cheaper the borrowing is.

Highlighting some eye-watering figures, if you have a credit card balance of £1,500 with an APR of 17% and choose to repay the minimum balance of either 2% or £5, the £1,500 debt will take a whopping 27 years and 10 months to repay and cost £2,481 in interest. Even more than the original debt!

Yet if you set a monthly fixed repayment of £75, that £1,500 in credit card debt will take just 2 years to repay and cost £252 in interest. A reduction in repayment term of 25 years and 10 months and saving £2,229 off of the repayment total – the price of a 2 week all inclusive family holiday in the Med!

NestEgg credit card repayment table

NestEgg credit card calculator table

You can use the Money Advice Service Credit Card Calculator to help better understand the cost of borrowing on credit cards.

About Adrian Davies

Adrian Davies is a co-founder at NestEgg. He is an alternative finance expert who's been supporting the credit union sector for 20 years with innovative ideas to help it grow by meeting member needs.

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