Top tips to keep you solvent: Don’t fall for minimums

Banks are clever at sums. Customers on the whole are not. Which is why the banks turned in record profits this year and we are a bit hard up most of the time.

For most people their worst debts are on credit cards. And, yes, that does include that tempting store card you took out at Topshop. Here’s how to get rid of them.

Step 1: Write down all your credit cards and the annual interest rates (APR) you pay on each.

If you do not know what rate you are paying, that is part of the problem. Another part is that many credit card companies do not put the APR on your monthly statement. Ring the helpline to find out.

Step 2: Sort your cards so that the biggest interest rate (APR) is top.

Cut that card up (ouch, I know) and go to Step 3.

Step 3: Change your payments.

The minimum payment the card company asks for is cunningly fixed to make your debt stretch into the distant future. Suppose you owe £1,000 on your credit card and the rate of interest you pay is 15.9% APR. You pay off the monthly minimum used by many cards – 2% of the debt or £5 if that is more. Then it will be a staggering 21 years three months before it is repaid. Over that time you will have paid £1,332 in interest – more than you borrowed in the first place!

The answer is simple – don’t pay the minimum. Take your current payment – say it is £20.25 a month – and make a standing order to repay that much each month. If you can afford it now you can afford it in future. Do that and your debt will be cleared in six years and five months and you will pay just £562 in interest, a saving of £770.

If you are horrified that a debt of £1,000 would still take more than six years to clear even after that big effort to pay it off, then double your repayment to £40.50. Then it will be gone in just two years six months and cost £206.50 in interest, saving you more than £1,000.

Step 4: If you can, do this with all your cards now. Otherwise dig this article out again in December 2009 and go back to step 2.

Paul Lewis is a freelance writer who presents Money Box on Radio Four.

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