Credit union in warning over post-Christmas debt
Shropshire residents have been warned that only making credit card minimum repayments could trap them in debt for years.
Shropshire’s not-for-profit savings and loans co-operative Just Credit Union says that while it can be tempting, particularly during challenging financial times, to make the minimum repayment, it can cause issues furthe down the line.
Steve Barras, Development Officer, said today: “What most people don’t realise is how long it will take to pay off and how much interest they will pay.
“If you borrow £3,000 on a credit card and make minimum repayments it could take over 25 years to repay and you will pay back thousands in interest.”
He said the minimum repayment was the lowest amount that must be paid each month. Failure to pay on time usually resulted in a fee and a missed payment could damage an individual’s credit score and their ability to get future credit.
The minimum payment was usually a percentage of their outstanding balance and was typically around 1-2.5 per cent of how much they owed or £5-£25, whichever was higher.
The minimum repayments must at least cover the interest, so that the balance would fall each month, provided more wasn’t spent. However, as the debt reduces so does the amount paid.
This meant it took longer to clear, and the longer a person borrowed for the more interest they would be charged. With any debt, the best option was to repay it as quickly and cheaply as possible. Minimum repayments did the opposite making debts last for longer and resulting in more money for the banks.
Mr Barras said borrowing £3,000, repaying a minimum amount and with no further spending on the card, would take 27 years with an interest cost of £4,000. This was based on £3,000 debt with a typical rate at 17.9 per cent, minimum payments of 1 per cent of the balance plus interest.
“We want people to pay off their debts as quickly and as cheaply as possible and start to build some savings," he said. "With a Just Credit Union affordable loan there are no hidden charges, arrangement fees or early repayment penalties. We will also carefully check the income and expenditure to ensure that the repayments are affordable.”
