If your rate is 40% and you only pay the minimum balance, it will take you almost 10 years to get out of that debt! Even on a prime credit card, where the APR is closer to 20%, making minimum payments means it will still take you 7 years to clear your balance.
That is crazy to us and a big problem for many people in the UK, who as a result are perpetually in debt, suffering from debt problems and most likely not fulfilling their full potential.
Research by the FCA estimates that around 4 million credit accounts are in what they call “persistent debt,” where borrowers have paid more in interest and charges than principal over the previous 18 months. These customers end up paying on average £2.50 in interest and charges for every £1 that they originally put on their credit card.
We have interviewed several UK citizens on how they would deal with unexpected expenses, and to our surprise, credit cards were usually their last resort despite cheaper rates than overdraft or payday loans, with many others accepting them as a necessary evil. As it turns out, this is because they have all had experience of credit card debts in the past and know just how long it takes to clear them. Few of them told us that they no longer carry their cards with them, and some have even cut up their credit cards.
Even though you could pay the full balance sooner, there is a tendency to just set it on the minimal amount and forget about it. You can end up in a situation where you forget about it and then years later you have paid way too much!
According to the FCA, “firms have few incentives to address customers with persistent debt as these customers are profitable.” And we agree – credit card companies have generally been fine with this arrangement, and historically even offered unsolicited credit limit increases to customers making only the minimum payments. To counteract these tricks and try to overcome people's naturally lethargy in managing their credit card balances, the FCA introduced new rules in 2018 to make credit companies highlight the issues to customers and encourage them to pay more than the minimum payment each month.
If you want a safer, simpler way to borrow that helps you avoid persistent debt, why not take a look at a Creditspring membership. To find out more click here.