24% struggling to meet credit card payments
One in five (19%) credit card customers made only the minimum payment in October, while 5% made no payment at all, new research has found.
The Debt Advisory Centre (DAC) said that the "concerning" figures were worrying as its research was carried out before the traditionally expensive Christmas period when people are more likely to spend on their credit card.
It found that 18- to 24-year-olds struggled the most to pay their credit card bills, with 26% only managing to meet the minimum payment in October and 13% admitting they missed it completely, leaving them paying more in interest and in charges.
A customer paying the minimum payment off a £2,500 balance on a typical credit card with an APR of 18.9% will take more than 25 years to clear the debt, the AOC said, and pay more than £3,000 in interest too.
Customers that fail to make the minimum payment will usually be charged a penalty - typically £12 – and any missed payments will also show up on the customer's credit history, potentially making it more difficult for them to obtain credit in the future.
However, the DAC also found that 49% of cardholders did pay off their balance in full each month, while 19% said they paid off more than the minimum payment but less than the full balance.
Ian Williams, spokesman for DAC, said: "It's concerning to see how many people were struggling to pay their credit card bill – even in October before the bulk of Christmas shopping costs hit. Many people will be unaware that just paying the minimum payment on their credit card each month could see them paying off their debts for many years to come.
"For those who are struggling to make the minimum payment each month, or who have already missed one or more payments, it is important to contact your lender or seek debt advice as soon as possible. The longer you leave it before asking for help, the more interest and charges can pile up."
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.