Are banks keeping credit cardholders in debt?

Laine Gordon

Laine Gordon

As interest rates rise so does the minimum repayments on your credit card, right? Wrong! Only a handful of credit card providers have changed their minimum repayment requirements over the years despite the credit card interest rate rises.

What does all this mean? On one hand it’s great – as consumers, we effectively get extra credit, as we’re borrowing more (through higher interest rates) but only having to pay back the same as before.

However, the sting in the tale is waiting for those who don’t pay their credit card off each month and simply make the minimum repayment. It’s now more likely, compared with a year ago, that instead of slowly chipping away at the outstanding balance, you’ll actually be increasing the amount you owe.

In effect, you may unwittingly be creating a credit card debt that never dies – just because you are paying the minimum owed each month. How can that be? The catch is that because credit card interest rates have increased, yet the minimum required has not, the amount you are paying is not even covering the combined cost of annual fees plus interest rate.

Of course, no-one is going to make a big deal about it, least of all the banks. They’re raking in more dough than ever. Laughing all the way to the bank, you might even say.

Paying only the minimum on your credit card has always been a shaky strategy in minimising personal debt levels but it’s even worse now that minimum repayments are lagging so far behind the recent rate rises.

For instance, paying only the minimum on a debt of $2,000 will now take you 11 years to clear that debt. That’s an increase of one year. If you owe $5,000, you can expect to be paying the minimum for the next 20 years. This would have taken you less than 18 years just twelve months ago. So you can see that relying on paying only the minimum on the credit card is gradually blowing out the debt.

The only way to get on top of the situation is to pay more than the minimum. Put as much spare money as you’ve got each month into your credit card debt and make a habit of doing this.

We’re all short of cash at times and that’s when paying the minimum on your credit card is a saviour. It’s best to keep it that way though and only use the minimum repayment as a stop-gap, not as a regular occurrence. Unless, of course, you want to make a voluntary contribution to the bank’s yearly profit figures!

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