Credit where credit is due... for decades

The minimum monthly repayments seem cheap but they'll go on for ever. Sam Dunn asks if lenders should demand more to save us from ourselves
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They say that whenever the US sneezes, the UK catches a cold. If the latest financial trend is anything to go by, millions of credit card users should get ready for a dose of the flu.

In the past few weeks, a number of the biggest US lenders, including Citigroup and Bank of America, have begun to ratchet up the minimum monthly repayment on many of their customers' card bills.

Borrowers used to paying back just 2 per cent of their outstanding balance every month may now have to fork out up to 4 per cent. Those juggling with lots of different credit repayments could find themselves in dire straits, consumer websites warn.

That banks have taken this step is down to the deep concern of US regulatory bodies over high levels of personal debt. It is a fear which is also felt in the UK, where low minimum repayments - the smallest sum demanded by your lender to chip away at your debt - have become the norm.

The Co-op, Egg, Halifax and Lloyds TSB all ask for just 2 per cent or £5, although others, including Nationwide and HSBC, demand 3 per cent. Rates were as high as 5 per cent a few years ago but have fallen due to fierce competition between credit firms, low interest rates and a benign economy.

One in 10 borrowers now pay only the monthly minimum, says the Association of Payment Clearing Services (Apacs), and that will condemn them to a long and expensive relationship with their debt.

Say you spent £2,000 on an Egg credit card at an annual percentage rate (APR) of 15.9, and just paid back the 2 per cent monthly minimum, or £5.

It would take you 28 years and four months to wipe the debt out, according to calculations from, the comparison website for financial products. That means an outlay of £2,743 just to borrow £2,000.

"The minimum is too low at the moment," warns Malcolm Hurlston, the chairman of the Consumer Credit Counselling Service (CCCS). It makes it easier for people to take on plenty of debt, he says - but the lower the minimum, the more interest you end up paying.

People are always coming to see them owing £100,000 across 16 credit cards - but the numbers are rising.

His colleague, Frances Walker, is more blunt: "Making the monthly minimum is a mug's game. We strongly advise you make more than this. People don't realise how expensive it is."

The CCCS's desire for a rise across the board is supported both by money- and the consumer group Which?.

Barclaycard, the UK's biggest card lender with 11 million customers, is addressing its own concern about repayments. It is piloting a new credit card that rewards users who pay more than the minimum each month with a cheaper APR. Clear over 10 per cent of your outstanding debt, and your interest will be 9.9 per cent; repay 5.05 per cent and this rises to 11.9.

If successful, the card will be rolled out nationwide: "[It] encourages responsible lending and better debt management," says a spokesman.

Although Barclaycard has no plans to go down the US route, it says it is always "watchful" of minimum repayment rates.

Citibank, the UK arm of Citigroup, is watching what happens in the US but says it is too early to decide about a rise in minimum payments here.

Other mainstream UK lenders are happy to keep their rates at today's lows, arguing that it's important to strike a balance for card users between payment flexibility and their debt management.

Which? disagrees. A spokesman says: "Higher minimums of between 3 and 5 per cent would make a big difference to the amount of interest paid - 2 per cent is too low."

However, a Citizens Advice spokesman warns that change could cause problems: "If someone is already paying £100 a month, a rise of, say, double this would make it very hard to pay off the money."

This danger is highlighted by Apacs. "It's better for consumers to make small minimum monthly repayments rather than default because of a higher minimum," says spokesman Mark Bowerman.

This is why the repayments are at today's levels, he adds: "It's a fine balance and something that needs constant monitoring."

However, there are no set rules governing the rates set by lenders, although the Banking Code insists members must "make sure that minimum repayment covers more than that month's interest".

Mr Bowerman says there are enough warnings in place already: "Every lender statement must now make clear that, if you continue to repay only the minimum amount, it will take you longer to clear the balance and cost you more." Credit card summary boxes should also tell you how much the minimum repayment will be.

Others argue for tighter regulation. After a recent inquiry into credit card charges, the Treasury Select Committee demanded that lender statements gave a clear illustration of how long a debt would endure, and how much it would cost, if users stuck to minimum repayments.

However, the Consumer Credit Bill on its way to the statute books has no clause insisting on such a move.

Instead, a number of banks are taking their own steps to inform customers. Barclaycard now provides an illustrative example with its marketing material showing how repaying the minimum on a £1,000 balance can mean it takes 20 years to clear the debt.

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