Money saving expert Martin Lewis has exposed a simple method that can save you 14 years of debt and hundreds of pounds in interest – thanks to a law he was involved in creating.
Martin Lewis has talked about how much more easily and quickly you can clear your credit cards with a simple repayment change.
Martin Lewis asked how long it would take if you spent £1,000 on a typical high street APR credit card at 21.9 percent interest, if you were just paying the minimum payment.
He put the question to his BBC Martin Lewis Podcast co-host Nihal Arthanayake – how long it would take, with a choice between three-and-a half-years, eleven years, 19 years or ‘it would never be paid off’.
Martin then explained how the law has changed in this area. He said: “It used to be the case that the minimum payment was set at below the interest rate. Which meant it would never be paid off.
“But the regulations – and I was involved in them so I’m quite pleased – changed so the minimum repayment always incorporates… is always more than the interest.
“The answer is, roughly 19 years.”
Martin then added that the minimum repayment in the first month would be £26.
He went on to explain: “If you just paid the minimum repayments, it would take you 19 years and the total interest cost would be £1,460.”
“But if you said, I can afford to pay £26 a month cos that’s the minimum repayment in the first month, so I’m gonna fix my repayment at £26, lock it in, and pay £26 every month, because the minimum repayment is a percentage of what you pay effectively, so it drops as you owe less.
“Then instead of repaying it in 19 years you repay it in five years and two months.
“Instead of £1,460 of interest, the interest would just be £609.”
Credit rating specialists Equifax set out that the minimum payment on a credit card is usually a percentage of your balance.
As the debt increases, the amount you will pay back increases because of compound interest, ie, interest paid on the interest. For many, such debts can lead to a spiral as people fail to clear the debt before accruing more debt.
People struggling to clear their loans are advised to contact an independent debt advice charity such as StepChange.
