8.3 Minimum repayments on credit card bills

When you have a balance on a credit card you will be expected to make at least a small payment towards paying off that balance each month. This is called a ‘minimum repayment’.

The minimum repayment required in a particular month will be displayed on your credit card bill in a section called ‘Payment’ or something to that effect.

Your credit card company will calculate your minimum repayment as a percentage of how much you owe in that particular billing month. It will also set out a minimum amount that must be paid in case the percentage amount is too low.

You can normally expect to have to make a minimum repayment equal to 3% of the outstanding credit card balance or around £5, whichever is greater.

There are pros and cons associated with making minimum repayments on your credit card bills and there is also a right and a wrong time to use this method for paying off your balance.

The ideal time to make minimum repayments, if absolutely necessary, is when you are on an interest free deal such as a 0% balance transfer or 0% on purchases offer. This is because you won’t be accumulating interest charges at this time and therefore all of your minimum repayment will go towards paying off your credit card balance.

However, the downside to this is that an interest free period is the ideal time to try to pay off as much of your balance as possible because everything you pay will be going towards paying off your balance and not be eaten up by interest charges. Ideally, you would want to clear the whole credit card balance during the interest-free period.

If you are currently paying interest on your credit card balance, it is probably the worst time to make minimum repayments. This is because a substantial portion of your minimum repayment will go towards the monthly interest charges (around half in some cases) and half of your payment will go towards paying off your outstanding balance.

Of course, if you are struggling to make ends meet, paying just the minimum repayment to keep the creditors away from your door will be an absolute godsend but it really isn’t ideal if you have some spare cash available to increase your repayments.

This is especially true if you are managing to save some money each month but then only managing to pay the minimum repayment on your credit card bills. The fact of the matter is that the amount of interest you will earn on any savings will be around two thirds less of that you will pay in credit card interest charges so the money you are saving would potentially do more good if used to pay off credit card debts.

Credit card lenders will now usually show you a warning on your credit card bill if you are paying off your debt in minimum repayments. The warning will inform you that by paying the minimum repayment it will take a lot longer to clear your debt and cost you a lot more in interest charges in the process.

Research by Moneynet.co.uk showed that someone with an average UK credit card balance of £1,384, paying interest at 18.9%, making the 2.25% minimum repayment would be paying their outstanding balance off for 27 years and eight months. This individual in these circumstances would pay £2,673 in interest charges on top of the amount they borrowed, at a total cost of £4,057.

If you need a credit card and it is likely that you will need to make minimum repayments it is worth checking what percentage of the outstanding balance is required as a minimum repayment by looking at the credit card’s summary box BEFORE you apply for the card. The amount required as a minimum repayment can vary quite a lot between different card providers and it is very important that you work out how much you can afford to put on the card, and what the corresponding minimum repayments will be, before taking out the card and using it.

This leads us onto how minimum repayments will affect your credit report.

By making minimum repayments you will not see a negative impact on your credit report so long as you pay the minimum amount on time and it reaches the credit card company without bouncing. In fact, your credit report will not show how much of your bill you pay each month but will just show if you’ve paid the bill as required by the credit card company which in all cases is at least the minimum repayment.

If you don’t pay your monthly bill on time, or at all, your credit report will show this ‘late’ or ‘missed’ payment and it will have a negative impact on your credit score.

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