Watch out for the minimum payment trap

New stats reveal more than 96% of Brits don’t understand credit card debt

A new study by TotallyMoney.com found that the majority of UK adults grossly underestimate the impact of just making the minimum payment, when paying off credit card debt.

When asked ‘how long would it take to clear £2,000 in credit card debt if you just pay the minimum each month’ (18% APR, minimum payment 2% of the balance or £5, whichever is greater) more than a third (36%) of respondents estimated the debt would be paid off in 5 years or less, 64% estimated the debt would be paid off in 15 years or less and 78% estimated the debt would be paid off in 25 years or less.

In reality, it would take over 34 years to clear the debt, an answer given by just one percent of respondents. Two percent of respondents came close to the correct answer, with 1%, estimating the debt would be cleared within 31 to 33 years; and a further 1% estimating the debt would be cleared within 35 to 37 years.

Respondents similarly underestimated the amount of interest they’d pay: over a third (36%) thought they’d pay less than £499 in interest, half (50%) thought they’d pay less than £999 in interest, and 64% thought they’d pay less than £1,999 in interest.

In reality, you’d be charged £3,983 in interest. Four percent of respondents estimated this figure correctly (plus or minus c.£100). 2.5% of respondents came close to the correct answer, with 2% estimating £3,500-£3,899 in interest, and a further 0.5% estimating £4,100-£4,599.

Alastair Douglas, TotallyMoney.com CEO said “What’s worrying about the results of this study, is the degree to which UK adults underestimate the impact of managing their credit card debt in this way.”

“These findings are particularly concerning given how respondents said they typically manage their credit card debt. Over one in ten (11%) admitted to just making the minimum payment each month. Still more worryingly, the minimum payment option is much more popular amongst younger people: 29% of 18-24 year olds and 21% of 25-34 year olds said that they just make the minimum payment each month.

“Moreover, it appears that there’s significant confusion around what making the minimum payment actually means. When those respondents who said they make the minimum payment each month were asked why they chose that option, 33% said they did so to avoid paying interest, and 18% said they thought it was the cheapest way to clear their debts.”

In response to these findings TotallyMoney have created this interactive piece to help people better understand how credit card payments work and avoid the minimum payment trap.

-ENDS-

For more information please contact PR executives Beverley Reinemann at beverley.reinemann@distilled.net or on 020 7183 0767 or Charlie McWilliams at charlie.mcwilliams@distilled.net or on 020 7183 0767.

NOTES TO EDITORS

About TotallyMoney.com

TotallyMoney.com, launched in 2007, is the UK’s leading credit-focussed comparison website which sets out to make it simpler for consumers to compare credit cards, loans and mortgages. We believe technology can drive a fairer credit market and better outcomes for consumers.

 About the study

Research was carried out online by Bilendi, which surveyed 1000 credit card holding adults in the UK between 11/5/15 and 15/5/15. All research conducted adheres to the MRS Codes of Conduct (2010) in the UK and ICC/ESOMAR World Research Guidelines. Bilendi is registered with the Information Commissioner’s Office and is fully compliant with the Data Protection Act (1998).

A breakdown of the results of the study can be found below:

Imagine you have £2,000 in credit card debt. The APR on your credit card is 18% and the minimum repayment is 2% of your outstanding balance, or £5, whichever is greater. If you just pay the minimum each month, how long would it take to pay off your debt?

5 years or less

36%

6-10 years

23%

11-15 years

5%

16-20 years

10%

21-25 years

4%

26-30 years

3%

31 to 33 years

1%

34 years

1%

35-37 years

1%

Over 37 years

16%

Again, imagine you have £2,000 in credit card debt. The APR on your credit card is 18% and the minimum repayment is 2% of your outstanding balance, or £5, whichever is greater. If you just pay the minimum each month how much interest would you have paid by the time you paid off the card?

£0-£499

36%

£500-£999

13%

£1,000-£1,499

10%

£1,500-£1,999

4%

£2,000-£2,999

10%

£3,000-£3,499

5%

£3,500-£3,899

2%

£3,900-£4,099

4%

£4,100-£4,599

0.5%

Over £4,600

15.5%

Which of the following most accurately describes how you manage paying your credit card bills?

TOTAL

AGE

18-24

25-34

35-44

45-54

55-64

65+

I just pay the minimum amount each month

11%

29%

21%

12%

6%

5%

3%

I pay the minimum amount, plus a little extra to help clear my debt

18%

13%

25%

24%

23%

13%

6%

I always pay the same amount off each month, regardless of what the minimum payment is

5%

4%

7%

6%

3%

5%

6%

It depends, I decide on the amount to pay off on a month-to-month basis depending on my funds

16%

15%

20%

21%

16%

16%

8%

I always pay off my balance in full

49%

39%

27%

38%

52%

60%

77%

Why do you only pay the minimum amount off your card each month? Please select all that apply.

(Only asked of those respondents who said they pay the minimum amount each month in the question above)

TOTAL

AGE

18-24

25-34

35-44

45-54

55-64

65+

It’s all I can afford

41%

16%

38%

50%

64%

75%

60%

To avoid paying interest

33%

60%

38%

20%

9%

20%

It’s the easiest option

30%

40%

31%

30%

18%

25%

It’s the cheapest way to clear your debt

18%

16%

20%

25%

9%

13%

20%

I think that’s what you’re supposed to do

2%

10%

 

For more information, please contact James McCaffrey

About TotallyMoney

TotallyMoney has been championing fairer and better consumer credit since 2007 by helping customers make smart borrowing decisions. We won Best Free Credit Report Provider in the 2018 Moneynet Personal Finance Awards and, in under 12 months, our Free Credit Report has already put more than 500,000 customers in control of their credit data.

Plus, we pioneered soft searching and eligibility scoring to reduce customers’ risk of being rejected for credit. Our services are designed to simplify personal finance, helping customers improve their credit rating and find the best products to meet their needs. To date, our platform powers the likes of Confused.com, Noddle, and ClearScore to name but a few.