The UK's Most Dangerous Credit Cards!

In this exclusive survey, we reveal the UK's deadliest plastic. Play your cards wrong and these cards could take more than forty years to pay off.

According to banking payments group APACS, the majority of the UK's 32 million credit card holders don't use their credit cards to borrow.

However, although most of us pay off our credit-card bills in full most months, a sizeable minority are unable to do this. Indeed, millions of people who are struggling to make ends meet (or have run up large debts) are forced to pay the bare minimum towards their credit-card debts some months, or even every month.

Paying only the minimum monthly repayment (MMR) is potentially disastrous, for two main reasons. First, if you don't pay off your card debt in full each month, you pay an interest rate which averages over 15½% a year. With the Bank of England's base rate currently just 4.5% a year, you can see how expensive borrowing on plastic can be.

The second reason why you should avoid paying only minimum monthly repayments is that they barely chip away at your debt at all. In other words, your MMR is made up largely of interest and other charges, leaving only a tiny amount to be deducted from your debt.

Here's an example: you borrow, say, £2,500 on a credit card which charges an interest rate of 1.5% a month (19.56% APR) and has a minimum monthly repayment of 2.5% (minimum £5). Paying only this minimum each month, it will take you (brace yourself!) 26 years and one month to repay this debt! What's more, over this period, you will repay a total of £6,058, made up of your original debt of £2,500 plus interest of £3,558. Ouch!

So, this relatively small debt lasts longer than the typical mortgage, simply because it was repaid using an MMR of just 2.5%. But surely no credit-card company would be crazy enough to set the minimum monthly repayment at such a low level? In fact, most credit cards charge an MMR of less than 2.5%, as my exclusive research for The Motley Fool reveals!

Using my copy of Moneyfacts magazine for July, I keyed the MMRs for 129 credit cards into a spreadsheet. Here's what I found:

• Only four credit cards had an MMR of 5%: the Capital One Classic Visa, the Coutts & Co. Classic Visa, and two Visa cards issued by First Trust Bank (NI).
  
  
• Only the ASDA MasterCard had an MMR of 4% (minimum £4; for all other cards, this was £5).
  
  
• 39 credit cards had an MMR of 3%, including various credit cards from American Express, Barclaycard, Capital One, First Direct, Halifax, HSBC, Marks & Spencer Money, Nationwide BS, Sainsbury's Bank and Tesco Personal Finance.
  
  
• Ten cards had an MMR of 2.5%; four from Bank of Ireland (GB), two from Bank of Ireland (NI), three from the Post Office and one from Sky.
  
  
• 26 cards had an MMR of 2.25%, all issued by MBNA or Royal Bank of Scotland/NatWest.
  
  
• 49 cards had an MMR of a suicidally low 2%, including cards from The AA, Barclaycard, Cahoot, Co-operative Bank, Egg, Goldfish, Halifax, Lloyds TSB, Marbles, Morgan Stanley and Smile.

Overall, across all 129 credit cards reviewed, the average MMR came to exactly 2.5%, but 75 cards charged an MMR lower than this (either 2.25% or 2%).

I've worked in financial services for almost two decades and, when I started out in the late Eighties, all UK-issued credit cards charged MMRs of at least 10%. Thus, in the good old days, all but the hugest debts would be paid off within a few years by paying minimum monthly repayments.

So, why did banks reduce their MMRs? First, to make monthly repayments lower and, therefore, allow cardholders to run up larger debts. Second, to increase their interest income: in the above example, it took £6,058 over 313 months to pay off a debt of £2,500. With an old-style MMR of 10%, this debt would cost £2,937 over 55 months, creating an interest bill of £437, compared to £3,558. Hence, by charging ever-lower MMRs, banks can create debts which last decades, making lots more money for their shareholders!

MBNA recently changed the definition of its MMR so that the minimum is now the total of any interest and fees plus £5. In other words, if you pay minimum monthly repayments with any MBNA-issued card, your debt reduces by £5 a month. So, if you only make the minimum payment with an MBNA card, the above debt would take almost 42 years to clear, at a total cost of £11,984!

In summary, minimum monthly repayments are a massive scandal and provide evidence that banks have lost their senses and no longer lend sensibly or prudently. For heaven's sake, don't pay MMRs: instead, set up a monthly standing order for a flat amount and stick to this repayment. One easy way to do this is to divide your current balance by, say, 25 and then set up a flat monthly repayment for this amount (which comes to 4% of your original debt).

In the above example, a flat repayment of £100 a month would kill our debt of £2,500 in just less than three years, with a modest interest bill of just £657. Even better, by transferring this balance to a 0% credit card, you could repay your debt interest free in just two years. That's the way to beat MMRs -- job done!

More: Use the Fool to compare credit cards, compare personal loans and compare savings accounts!