This dangerous mistake could cost you £10,000

Make this mistake and a £2,500 credit card debt will take you 50 years to pay off and cost you over £10,000...

If you've got credit card debt, chances are you think there's nothing wrong with only paying the minimum you have to every month.

You might even think it's pretty kind and generous of your credit card provider to allow you to do so.

But you'd be wrong.

Minimum payments

Here’s a quick illustration of how a credit card debt of £1,000 and an APR of 18.9% could potentially escalate if you only paid the minimum payment each month, and how topping it up with extra funds could make a huge difference:

Minimum payment (2%), plus an additional payment of:	Time taken to pay off debt	Interest paid
£0	33 years, four months	£2,769.10
£10	Six years, five months	£576.53
£25	Three years	£262.85
£50	One year, seven months	£135.02
£100	Ten months	£65.13

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And here’s the same scenario for a debt of £2,500:

Minimum payment (2%), plus an additional payment of…	Time taken to pay off debt	Interest paid
£0	50 years	£7,852.38 (!!)
£10	13 years, five months	£2,769.26
£25	Six years, nine months	£1,453.60
£50	Three years, nine months	£807.90
£100	Two years	£421.13

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As you can see, the more you pay off each month on your credit card, the quicker and less expensive it is to borrow on your card.

Obviously, the ideal amount you’d want to pay off is the entire sum, which would mean you’d never pay a penny in interest. But not everyone can afford to do this every month, making the ‘ideal’ situation far from reality for many people.

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However, I want to stress that the more you can pay off, the better. Even relatively small amounts can make a massive difference.

For example, if you racked up £1,000 on a credit card with an APR of 18.9%, it would take you over 33 years to pay it off and an extra £2769.10 in interest if you only made the minimum payment each month. This compares to just 10 months and £65.13 in interest if you can afford to throw an extra £100 a month at the debt.

So effectively, paying an extra £100 a month you will save more than £2,700 in the long run - and more than 32 years of debt repayments!

And bear in mind that's just on a £1,000 debt. The more debt you have, the more it will cost you. With £2,500 of debt racked up on the same credit card, only making the minimum payment means it would take you a startling 50 years to pay your debt off.

On top of this, you’d pay £7,852.38 in interest. That’s three times the original debt in interest payments alone!

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Every little helps!

So, the message may sound rather like an Oxfam appeal, but extra payments of just £10 a month would - in the end - save you a massive £5,083 in interest on a debt of £2,500. That’s enough to buy a decent second hand car. Food for thought indeed.

So that’s how minimum payments can affect the time taken to pay of your debts, but what about your APR?

APRs are often overlooked in terms of how they can affect your debt, and while we’re seduced by the prospect of 0% balance transfer offers, the rate of interest you’ll pay when your introductory offer expires can prove crucial.

So, as an illustration of how your APR could affect your debts, here’s how the interest could rack up on a £2,500 credit card bill depending on your APR, taking into account payments of £100 a month:

APR	Time taken to pay off debt	Interest paid
12.9%	Two years, four months	£365.83
14.9%	Two years, four months	£437.17
18.9%	Two years, six months	£593.48
27.9%	Two years, 10 months	£1,053.91

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As you can see, although there is a less significant impact on the time taken to pay your debt off, the APR on your credit card could make a significant difference in the amount of interest you end up paying overall.

For example, the difference in cost between a credit card with 12.9% and 18.9% APRs during the time taken to pay it off is £227.65.

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It’s not exactly rocket science, but the costs get higher as the APR rises, and the difference between interest payments for a credit card with 12.9% and 27.9% APRs is £688.08 - enough for a decent holiday.

Higher APRs approaching 30% are normally associated with credit cards for people with less-than perfect credit ratings, or store cards. If you’re not careful, borrowing using one of these could end up costing you a lot more than you bargained for.

The best cure for credit card debts is to transfer them onto a 0% credit card which will reduce your overall interest payments significantly. Get a best buy 0% card from lovemoney.com.

If you need to spend on a credit card and don't have enough to pay off the balance in full, then get a 0% on purchases card instead. Find out more by reading Top credit cards for spending!

This article was updated in April 2010

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