Lower minimum payments cost consumers more

Some credit card holders are having their monthly minimum repayments shrunk in a move which the Daily Mail calls a "new ruse to grab your cash."

While a lower monthly minimum repayment rate sounds appealing, as it makes the credit card bill more affordable, it actually means that customers paying only the minimum back will take longer to clear their debt and end up paying their provider more money.

According to the banking code, credit card providers have to demand a monthly minimum repayment that more than covers interest accrued. This way, customers who repay the minimum will still be paying off a proportion of the outstanding debt instead of just treading water paying off interest.

By reducing the minimum repayment providers ensure that cash strapped customers who opt to pay the least permitted pay a smaller portion of their overall debt.

The Daily Mail quotes research from Moneyfacts which shows that a customer with a £1,000 debt on a card with 14.9 per cent APR, paying only a 2 per cent minimum payment, would take 20 years to finish paying the debt back, including £1,116 in interest.

By contrast the same customer paying three per cent would clear the debt in 11 years. Repayments at the rate of seven per cent would allow the debtor to pay off the debt in just five years.

The best way to manage debt is to pay as much as possible every month, with the ideal being to repay the full amount.