By . Sam Dunn . PUBLISHED: . 18:28 EST, 31 January 2014 . | . UPDATED: . 18:29 EST, 31 January 2014 . Credit card companies rake in £1.4billion a year by shrinking the minimum amount cardholders have to pay back (library image) Credit card companies are quietly raking in an extra £1.4billion a year by shrinking the minimum amount cardholders have to pay back. Around one in ten borrowers repays only the minimum sum requested every month and each now finds themselves more than £400 worse off each year. Set by the bank and intended to help households manage their debts, minimum repayments are set at a percentage of the outstanding debt plus interest or £5 – whichever is the greater sum. In 2010, the average was 2.15 per cent – today it is just 1.53 per cent, according to TotallyMoney, a credit card comparison website. Based on the UK’s average £1,905 credit card debt, this adjustment costs a borrower an extra £411 in interest a year – and means it will take them two more years to clear their debts. In total, card firms are raking in an estimated extra £1.4billion a year from the 3.3million customers who pay only the minimum. Britons owe more than £55billion on credit cards – nearly three times as much as in 1998. Will Becker, chief executive of TotallyMoney said: ‘Many making the minimum repayment are never going to realise this has happened and are certainly never going to figure out how much it is going to cost them. ‘With lower minimum repayments, getting rid of that credit card debt could be a long and expensive process for borrowers.’ The repayments cover at least the interest on cardholders’ debts, so the outstanding balance will fall each month. But the less customers repay, the longer it takes them to clear their debt, and the more interest the credit card company makes. If a borrower spends £2,000 on a credit card with interest at a typical 18.9 per cent and repays only a minimum 1pc plus interest, it would take 19 years and 10 months to clear what is owed. Britons owe more than £55billion on credit cards - nearly three times as much as in 1998 . The total interest payable would be £2,551 on top of the original £2,000 debt. However, if the same customer repaid 5pc of the outstanding balance each month, they would pay just £287 in interest – and be free of debt in three years and 10 months. David Black, banking specialist at independent analysts Consumer Intelligence, said: ‘This can cause real pain. If you’re only making the minimum payment on your credit card each month, it could take years extra to clear your balance with all the extra interest.’ A spokesman for Moneyfacts consumer group . said: ‘Whilst credit cards allow shoppers to have a bit of breathing . space they will be shocked by the amount of time it will take to pay off . relatively small amounts of purchases. ‘You should always aim to pay over the minimum required to substantially reduce your balance over time.’ Richard Koch, head of card payments at the UK Cards Association, said customers were repaying more debt overall. ‘The average amount that cardholders repay each month has risen over the last two years,’ he said. ‘Cardholders now pay off 21pc of their outstanding bill in a month on average – up from 18pc in 2011.’
One in ten only repay minimum each month and are £400 worse off .
Minimum repayments set at a percentage of debt plus interest or £5 - whichever is the greater sum .
Britons now owe more than £55bn - three times as much as in 1988 .
By . Sam Dunn . PUBLISHED: . 18:28 EST, 31 January 2014 . | . UPDATED: . 18:29 EST, 31 January 2014 . Credit card companies rake in £1.4billion a year by shrinking the minimum amount cardholders have to pay back (library image) Credit card companies are quietly raking in an extra £1.4billion a year by shrinking the minimum amount cardholders have to pay back. Around one in ten borrowers repays only the minimum sum requested every month and each now finds themselves more than £400 worse off each year. Set by the bank and intended to help households manage their debts, minimum repayments are set at a percentage of the outstanding debt plus interest or £5 – whichever is the greater sum. In 2010, the average was 2.15 per cent – today it is just 1.53 per cent, according to TotallyMoney, a credit card comparison website. Based on the UK’s average £1,905 credit card debt, this adjustment costs a borrower an extra £411 in interest a year – and means it will take them two more years to clear their debts. In total, card firms are raking in an estimated extra £1.4billion a year from the 3.3million customers who pay only the minimum. Britons owe more than £55billion on credit cards – nearly three times as much as in 1998. Will Becker, chief executive of TotallyMoney said: ‘Many making the minimum repayment are never going to realise this has happened and are certainly never going to figure out how much it is going to cost them. ‘With lower minimum repayments, getting rid of that credit card debt could be a long and expensive process for borrowers.’ The repayments cover at least the interest on cardholders’ debts, so the outstanding balance will fall each month. But the less customers repay, the longer it takes them to clear their debt, and the more interest the credit card company makes. If a borrower spends £2,000 on a credit card with interest at a typical 18.9 per cent and repays only a minimum 1pc plus interest, it would take 19 years and 10 months to clear what is owed. Britons owe more than £55billion on credit cards - nearly three times as much as in 1998 . The total interest payable would be £2,551 on top of the original £2,000 debt. However, if the same customer repaid 5pc of the outstanding balance each month, they would pay just £287 in interest – and be free of debt in three years and 10 months. David Black, banking specialist at independent analysts Consumer Intelligence, said: ‘This can cause real pain. If you’re only making the minimum payment on your credit card each month, it could take years extra to clear your balance with all the extra interest.’ A spokesman for Moneyfacts consumer group . said: ‘Whilst credit cards allow shoppers to have a bit of breathing . space they will be shocked by the amount of time it will take to pay off . relatively small amounts of purchases. ‘You should always aim to pay over the minimum required to substantially reduce your balance over time.’ Richard Koch, head of card payments at the UK Cards Association, said customers were repaying more debt overall. ‘The average amount that cardholders repay each month has risen over the last two years,’ he said. ‘Cardholders now pay off 21pc of their outstanding bill in a month on average – up from 18pc in 2011.’
requested every month and each now finds themselves more than £400 worse off each year. manage their debts, minimum repayments are set at a percentage of the outstanding debt plus interest or £5 – whichever is the greater sum. In minimum. Britons owe more than £55billion on credit cards – nearly three times as much as in