In our recent guide on how to track down your debts, we discussed how a debt problem can be all-consuming, and that small purchases and loans add up fast. Most of the time, you will find yourself bogged down trying to make ends meet, always thinking about how to afford the next payment. This leaves little time to consider the long-term picture. When it comes to the big purchases in life such as buying a home, debt is generally part of the deal and most of us accept that. However, similar acceptance of unsecured debt (credit cards, payday loans, store cards, catalogues, hire purchase payments, etc.) can lead to a big problem. Before borrowing from any source, you should ask two key, longer-term questions:
- Can I afford the interest on this
- How long will this take to repay?
The answer to the latter question can be shocking, and will often change your initial answer to the first. Below is our guide to interest rates on unsecured debts, and the truth about how long it really takes to pay them off
Minimum credit cards repayments – the start of a spiral
Minimum monthly repayments are set at very low levels, sometimes as low as 2%. It can be tempting to take advantage of this. In the short-term you have access to credit, your credit rating is unaffected, and after all, you may be juggling other debts and expenses. Nonetheless, we cannot advise against it strongly enough. Paying the monthly minimum on credit card balances will cost you dearly and take years to pay off in full. In some cases, thousands of pounds over a period of decades.
It is easiest to demonstrate how bad an idea minimum repayments are by way of example. Using the example of a £1,000 balance on a somewhat typical 18.9% APR card, the Mirror found that two-fifths of people had ‘no idea’ how long it would take to clear the balance. In this instance, the minimum repayment would be £25 a month. If this was your only monthly contribution, it would take over 5 years to repay, and you would have paid £509 more in interest than what you initially borrowed.
The results are even more striking if we scale up the outstanding balance. An excellent resource you should take advantage of if you have a credit card, or are considering taking one out is the ‘Reality Check’ Calculator, created by This is Money. We used the calculator to see how long it would take to repay a more extreme £10,000 card at minimum repayment. Again on a standard 18.9% APR card, the calculator shows that it would take 184 minimum monthly repayments of £167 to clear the balance. That’s 15 years and 4 months.
Currently, around 10% of credit card users are making the minimum monthly repayment. In our time assisting over 16,000 clients, we have found that the additional interest charges you incur by doing so can commonly trigger a serious debt problem.
What can you do?
Which? – the UK’s consumer association, and Money Super Market both have similar calculators to the one used above. Your first step should be to use one of these so as to see the big picture: how long will this take me to repay, and at what extra cost? Recently we talked about the rollover option on payday loans, and how this can multiply your debt in just a few months. These calculators allow you to enter whatever interest rate you want, and so can be used for any unsecured debt including hire purchases, store cards, and payday loans.
Once you see the full picture, you will no doubt see that it is best to pay whatever you can each month towards the balance rather than just the minimum amount. Obviously, the full amount each month would be ideal, but if you are a regular to our blog there is a good chance this is unaffordable for you at the moment.
Not to worry, a little goes a very long way here. Calling back to our first example above, the £1,000 18.9% APR card, we can see that small increases can save you hundreds in interest and cut the time to pay significantly. By upping the repayment by just an extra £5 (to £30 p/m,) you would clear the £1,000 balance in under 4 years, paying £378 interest as opposed to £509. Push it up to £45 a month and you would repay 2 years and 4 months, with interest down to £217.
Clearly, boosting payments by a small amount each month can help to tackle this debt a lot quicker and save you a fortune in interest. This is the core principle of the ‘debt snowballing method’ we’ve spoken about before.
If your credit rating is still relatively strong, an even more effective way of making savings on interest is to transfer the balance to a 0% interest balance transfer card. As the name suggests, these allow you to move debt from one card to a 0% interest card, which can last as long as two or three years. With a bit of planning and the right deal, this should help you entirely cut the interest you have to pay, and of course, pay off the outstanding balance quicker. Money Saving Expert’s Credit Card Eligibility Calculator is a go-to resource to find out the best deals you will be eligible for.
Where we come in
If you are reading this blog, there is a chance things have gotten on top of you already, and your situation calls for more drastic measures. You are far from alone. At the end of 2018, each UK household owed £886 more on average than it did 12 months previously. This figure doesn’t include outstanding mortgage debt or student loans.
Amidst a national debt crisis, we at Trust Deed Scotland offer a legislative option that can set you on your way to a financial fresh start. The Protected Trust Deed is our specialist service. Once protected, your licensed insolvency practitioner will handle all correspondence with each of your creditors for you. The Trust Deed will see you debt free in 4-5 years, so long as you make your single monthly contribution – which is tailored to your specific needs and lifestyle. As this monthly amount is based on what you can reasonably afford it is likely to be significantly less than your current debt repayment.