The Debts That Wouldn't Die!

If you don't play your cards right, then your credit-card debts could last thirty years. We show you how to conquer your plastic.

With total credit card debt now standing at £54 billion, the average British household owes an average of almost £2,200 on plastic. Although £2,200 doesn't appear to be a lot of money, it can take decades to pay off a credit-card debt of this size if you play your cards badly.

How long it will take you to repay plastic debts depends on three variables:

• 1.    the interest rate charged;
• 2.    your monthly repayments; and
• 3.    whether you pay premiums for rip-off payment protection insurance (PPI).

In the examples below, I'm going to assume that you haven't purchased ridiculously overpriced PPI, and that your annual percentage rate is 16.5% APR. This is the average interest rate charged by a typical credit card, which works out at interest of 1.28% a month compounded.

Of course, the higher your monthly repayments are, the faster your debt is paid off. However, few cardholders realise what a massive difference raising your repayments makes. Let's find out how minimum monthly repayments (MMRs) make lenders huge profits while costing you a fortune.

The table below shows how long it takes to repay a credit-card debt of £2,200, using an interest rate of 16.5% APR (and without PPI):

The important point to note is that your MMR is based on your latest statement balance, not your original debt of £2,200. So, as you make repayments and your balance reduces, so too do your MMRs. Most lenders have a floor limit for MMRs of £5, which I've taken account of in my calculations.

So, using an MMR of 2%, it will take you almost 32 years to clear your original debt of £2,200, and cost you a grand total of £5,825. That's longer than most mortgages last, for heaven's sake. Ouch!

Simply increasing your MMR by a fraction to 2.5% knocks more than a decade and £1,442 off your long slog. Furthermore, bumping up your MMR to a more sensible 5% will bring down your repayment period to less than nine years, and reduce your interest bill to a more modest £739.

However, MMRs themselves are nothing more than a tool of the Devil, designed to make borrowers poor and lenders rich. Hence, I'm now going to show you a brilliant yet simple way to repay your debt much faster, without overstretching yourself.

Forget MMRs -- make flat repayments instead!

Our original debt was £2,200, so let's make our new monthly repayment, say, 4% of this figure. However, instead of paying an MMR of 4%, we set up a flat monthly repayment of 4% of our original debt. In this example, 4% of £2,200 is £88, which we pay each month by direct debit or standing order. So, instead of our monthly repayment falling as our balance reduces, it remains at £88 for the life of the debt.

Now let's run those calculations again:

As you can see, a flat monthly repayment of 4% pays off our £2,200 debt in two years and seven months. This is almost two years faster than using a much larger MMR of 10%, which takes four years and five months. Now do you see why I call MMRs a tool of the Devil?

So, if you're not in complete control of your debts, or you'd like to pay them off quicker, then you should avoid MMRs like the proverbial plague.

Finally, if you want to repay your debts even faster, then simply shift them to a 0% credit card which charges no interest on balance transfers. Without any monthly interest charge, your debt will quickly dive until it reaches zero -- and then you can breathe easily again!

More: Shuffle your deck in our credit card centre | 0% vs Cashback Credit Cards | Pay 0% On Your Purchases And Debts