Get out of debt quicker: credit card edition

Owing a large amount of money on a credit card is no one's idea of fun. With high interest rates, maintaining a credit card balance can add up to a huge amount of money being thrown away. 

The good news is that you can save yourself lots of time and money by learning one key trick that will help you pay it off quicker!

Avoid the minimum payment trap!

It’s that simple - make sure you pay off more than the minimum payment each month. Your credit card provider is highly motivated to get you to pay off your balance as slowly as possible - that way they earn more money. 

Credit cards all come with the option of simply paying off a minimum amount each month. The minimum payment is a percentage of your outstanding balance; typically around 2% of your balance. Each month your minimum is recalculated based on your current balance.

You may think that the best way to pay off your credit card is to maintain minimum repayments but simply spend less on it. Unfortunately, because the minimum payment is based on a percentage of the outstanding balance, the lower the balance the lower the minimum payment required will be.
By lowering your minimum repayment, your credit card provider is hoping you'll like the look of that lower number and meet the minimum repayment - which nudges you back into the habit of only repaying the minimum and taking longer to pay it off in total. 

Here's how it looks;

Someone who has a £2,500 balance on a credit card that charges an 18% APR will have a minimum payment of £50 in the first month (assuming their minimum is calculated at 2% of their balance).

Paying the £50 minimum means they're reducing their overall balance to £2,450 (assuming they didn't incur any charges). 

The next month, they don't spend any money on the card and because of this the minimum is slightly lower at £49.75.

Each month that passes where no more money is being spent on the card the minimum repayment will continue to get lower. But is that really bad? Sounds quite good...

Carrying on this way means it will take the person in our example over 38 years to pay off the balance, during which interest payments will total nearly £5,300.

How to make sure that doesn’t happen to you

See what the initial minimum payment is. Then set up a direct debit to pay off that same amount every month. That way you know you’re paying off more than the minimum, and you’re choosing what to pay off yourself rather than letting the bank do it. 

If you know you can afford a £50 repayment every month, you should be able to afford this every month. If you find that you’re able to afford more than the £50, even by just £5 or £10 every now and then, it will make a massive difference in what you repay. 

Really? What would that look like?

In this case, instead of needing more than 38 years to pay off the debt, you will get it paid off in 7 years and your total interest charges will be less than £1,800. You just saved yourself more than 30 years of debt and around £3,500 in interest payments.

Most credit card companies will collect a fixed monthly amount stipulated by the cardholder, not just the minimum. So what are you waiting for? Start overpaying that card!