Urgent warning for millions of credit card customers over tweak that could cost THOUSANDS in interest – how to avoid it
MILLIONS of credit card customers face paying thousands extra in interest due to a double whammy of changes.
Interest rates are rising and yet banks are reducing minimum payments — they say to offer flexibility, but it means you are paying back debt for longer so shelling out more.
Rosie Murray-West looks at how to tackle credit card debt . . .
DOUBLE TROUBLE
CREDIT card giant Barclaycard last month announced a cut to its minimum payments for customers.
Meanwhile Bank of England figures show households borrowed an extra £200million on credit cards last month.
And those who do not pay off cards in full each month face average interest rates of 25.8 per cent, up from 19 per cent ten years ago, says comparison site Moneyfacts.
So millions will now take longer to clear debts, and at higher interest, so pay out thousands more over the years.
MINIMUM PAYMENT, MAXIMUM PAIN
HOUSEHOLDS have on average £2,500 in credit card debt which is not paid off in full at the end of every month, says The Money Charity, and about three in ten of us make just the minimum pay-ment each month.
Banks are free to set minimum payments and, the lower they are set, the longer it takes customers to pay off debt and the more the bank makes in interest.
Barclaycard recently wrote to its customers to say it is changing how it calculates minimum payments so they are set at one per cent of the amount owed on a card, or £5, whichever is more.
By law, a minimum payment must cover the interest, fees and charges applied to the customer’s account plus a minimum of one per cent of the sum the customer owes.
It decreases as the balance goes down.
For Barclaycard, many customers were previously paying 2.5 per cent of their balance, plus interest, as the minimum pay-ment, while some were paying 3.75 per cent.
Someone owing £5,000 on a Barclaycard and making mini-mum payments at 2.5 per cent plus interest at 24 per cent would have paid £3,500 interest and cleared the balance in 14 years.
But now they would pay far more.
The interest paid would top £8,500 and it would take over 30 years to clear the balance.
HOW BANKS COMPARE
BARCLAYCARD says it is giving customers more flexibility with the new minimum payments, but experts say it will generate more profit for the bank.
Sara Williams, from advice site Debt Camel, fears people will be unaware of the extra they will pay.
She says: “Many would not have expected paying the lower minimums would mean being in debt for twice as long and pay-ing more than twice as much interest. This is likely to generate a lot more profit for Barclaycard.”
Some of Barclays’ rivals, including Santander and NatWest, already use a similar repayment formula, but others ask for higher minimum repayments.
American Express, for example, has a minimum repayment of two per cent of balance, while Halifax’s is 2.5 per cent.
Banks also set a minimum amount that must be paid back as well as a percentage of the balance and this can vary, with some setting this as £5 and others at £25.
Complaints about credit card companies offering unaffordable rates and not intervening when customers run up debts are rising.
There were 3,000 in the last quarter of 2023, compared with 700 in the same period the year before, according to the Financial Ombudsman Service.
The Financial Conduct Authority, which regulates credit card companies, says it expects any company that reduces the minimum payment on credit cards to have assessed if this will produce good outcomes for customers, while they should also communicate the costs.
IF YOU’RE STUCK ON THE MINIMUM PAYMENT
IF you are paying the minimum payment on any credit card and paying interest on the balance, taking even small steps to in-crease this payment will decrease your debt burden and pay the debt off more quickly.
See the help box above for suggested solutions.
If you are struggling with debt, see a free and impartial adviser.
Citizens Advice, has a debt helpline 0800 240 4420, or try the StepChange debt charity on 0800 138 1111.
Steps to clear debt
IF you have a credit card balance and can’t pay it back in full, consider the following options . . .
Using savings to pay off your credit card: Do you have expensive debt but also savings? Use these to pay off your card so you are not racking up interest.
Paying expensive debt first: If you have several credit card debts and you’re only paying the minimum on them, try to increase the payment on the most expensive debt first to clear it.
By tackling high interest rate debts first and throwing as much money at them as possible, you’ll clear them faster and pay less overall.
Transferring the balance to a lower rate: Shift your balance to a low or zero-rate credit card if you have a good credit score but are paying interest on a balance you cannot pay back.
This can give you breathing space to pay back the loan with lower interest – but make sure you do continue to pay the minimum or your interest will shoot up, and ensure you have a plan to pay back the balance over the term.
Use an eligibility tool like MoneySuperMarket’s to check if you will get accepted for a card without damaging your credit score.
Do your maths: A bank loan could offer lower interest rates than a credit card so that you pay less overall to clear the debt, but ensure you are able to prioritise the monthly payments and do not borrow any more than you need to clear the debt.
Always check before applying and avoid applying for more than once in six months.
‘You risk paying double what you borrowed’
IAN DEMPSEY paid thousands of pounds extra in credit card fees when he was stuck paying the minimum amount in his twenties.
He ruined his credit score after he maxed out the £500 limit on a credit card when he was a student in 1998 and was charged late fees for missed payments.
In his twenties Ian made the same mistake after he had kids – and at his worst was paying 49 per cent interest on a balance of several thousand.
He eventually cleared the payment by switching to a lower-rate card when his credit rating improved.
Ian, 43, from Bedfordshire, is now a financial adviser who gives tips to avoid debt as @idthemoneyman on Instagram and TikTok.
He says: “People are not aware it can take ten years to pay back and be double what you borrowed.”
Tesco time limit
MILLIONS of Tesco shoppers have just weeks left to use up £17million worth of Clubcard vouchers or risk losing them for good.
The supermarket giant has warned there are £16.9million worth of Clubcard points due to expire on May 31.
If you decide to use the vouchers, which were first issued in May 2022, every 150 points can be exchanged to the value of £1.50.
They can also be doubled in value to spend at more than 100 reward partners including Pizza Express and Zizzi.
Tesco’s chief commercial officer, Ashwin Prasad, said: “With millions of vouchers expiring, we are urging everyone to make the most of their Clubcard this May and check to see if any vouchers or reward codes are expiring.”
Shoppers can build up points by scanning their card or app every time they spend.
For every £1, you get one point which is worth 1p.
Drivers filling up at Tesco forecourts get one point for every two litres of fuel bought.
You will need a minimum of 150 points to request a voucher.
Loyalty card holders can also get cheaper prices on over 8,000 items.
Get ahead of lenders rates
BORROWERS face higher mortgage bills after a flurry of lenders raised rates.
Halifax, NatWest, Nationwide and Santander all hiked costs this week.
The move follows increases from Barclays and HSBC among others.
Mortgage rates have been drifting upwards since earlier this year, reversing downward trends seen in 2023.
The typical two-year mortgage rate now sits at 5.91 per cent, up from 5.59 per cent at the start of February, according to data site Moneyfacts.
And the average five-year deal is 5.49 per cent, up from 5.23 per cent in February.
The change hits homeowners looking to remortgage or those in the process of buying a property.
Mortgage rates are largely driven by when money markets expect the Bank of England base rate to change.
Forecasters now expect a rate cut later in the year.
Chris Sykes, technical director at mortgage broker Private Finance, assured: “There is no need for alarm – these rate rises have been minor so far.
“They emphasise the importance to consider remortgage options with time and secure a rate as early as possible, typically around six months before the current term ends.”