The true cost of credit card debt

Make this common mistake with your credit card and it can end up costing you £84,000.

If you think it's nice of your credit card provider to allow you to pay off a small sum of your outstanding debt each month, think again.

It might seem like they've being kind and generous, but the fact is, if you only pay off the minimum payment on your credit card each month, you are the one that suffers - not them.

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How to destroy your credit card debt quickly and effectively.

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Today, I'd like to show you just how this nasty trick works.

Minimum Payments

Let's look at what would happen if you only met your minimum payments on your credit card each month, no more.

Your card provider may expect you to pay either £5 a month, or 2% of your balance, whichever is the greater amount.

Or alternatively, particularly if the card has been issued by MBNA, it may expect you to pay either £25 a month, or around 3% of your balance, whichever is the smaller amount.

This may seem like a tiny, technical difference, hidden in the small print. But it can cost you hundreds of pounds.

Adopt our goal: Pay off credit card debts

Here's what would happen to your credit card debt if you paid £25 every month, and your card charged you a typical APR (15.9%).

First, let's look at it over one year:

Balance	Interest Rate On Credit Card (APR)	Payment per month	Total amount outstanding after one year
£1,000	15.9%	£25	£874
£1,500	15.9%	£25	£1,460
£2,000	15.9%	£25	£2,021
£3,000	15.9%f	£25	£3,193

As you can see, if you only pay the minimum payment for a year, you'd have paid off £136 of your debt. But during this time, you'd have paid £300 towards your card provider. That's £164 you've wasted on interest payments.

And if you started off with £3,000 of debt, your debt would have grown by £193 - even though you had paid £300 towards it. That means you're £493 worse off at the end of the year.

Remember, throughout this entire year, you've been faithfully paying £25 a month. And you haven't spent a penny on that card during that entire time.

Even if your card provider forced you to pay a higher minimum payment, you would still waste hundreds of pounds in interest.

Balance	Interest Rate On Credit Card (APR)	Payment per month	Total amount outstanding after one year
£1,000	15.9%	2% of balance (£20, initially)	£919
£1,500	15.9%	2% of balance (£30, initally)	£1,379
£2,000	15.9%	2% of balance (£40, initially)	£1,839
£3,000	15.9%	2% of balance (£60, initially)	£2,759

In this example, if you started off with a £3,000 balance, you would only have managed to reduce your debt by £241, despite paying £702 to your card provider over the course of a year. So, effectively, you've wasted £461.

You could avoid all this by switching to a 0% balance transfer card and increasing your monthly payments, as follows:

Balance	Payment per month	Total amount outstanding after one year	Amount you have saved by paying off your debt
£1,000	£83.34	£0	£153
£1,500	£125	£0	£230
£2,000	£166.67	£0	£307
£3,000	£250	£0	£461

If those payments seem a bit steep - and let's face it, a jump in your payments from say £60 a month to £250 could be difficult to manage - then you could decrease the monthly payments by 50% (from £250 to £125) and move your balance to another 0% balance transfer card in 12 months' time.

What! More switching!

I'm guessing some of you will not exactly be taken with that last piece of advice. Not only does it involve mores switching, you will still have to substantially increase your payments every month.

Find out how to pay less interest on your credit card spending, and kick you debts into touch more quickly

But let's face it, if you don't want to step up your payments this year, you'll want to do it even less next year, when your debt will be bigger and the amount you need to pay every month will be larger.

So, let's take a look at what would happen if you didn't change your approach this year, and simply carried on making those minimum payments.

Watch our video: The clever way to beat your credit card debts

Let's also assume you didn't read the small print and took out a card from credit card provider MBNA, where the minimum payments are either £25 a month or 3%, whichever was the smaller amount.

What would your balance look like after five years?

Balance	Interest Rate On Credit Card (APR)	Payment per month	Total amount outstanding after five years	Amount you would have saved by paying off your debt this year
£1,000	15.9%	£25*	£372	£678
£1,500	15.9%	£25*	£1,044	£1,434
£2,000	15.9%	£25*	£2,151	£1,651
£3,000	15.9%	£25*	£4,365	£2,865

* Or 3%, if it is the lower payment

As you can see, if you owe more than £1,500, a £25 monthly payment is too low an amount to keep up with the interest rate you are paying.

So your debt is getting bigger, instead of smaller.

In this example, from an original £3,000 balance, the debt has mushroomed into £4,365 after five years - swallowing up £1,500 of payments along the way.

Clearly, the debt is spiralling out of control at this point.

But let's say you didn't increase your payments even after five years. Here's what would happen to your debt over the next 25 years:

Balance	Interest Rate On Credit Card (APR)	Payment per month	Total amount outstanding after 25 years	Extra amount you owe, on top of your original debt
£1,000	15.9%	£25*	£0 (paid off after 12 years, 8 months)	N/A
£1,500	15.9%	£25*	£0 (paid off after 18 years)	N/A
£2,000	15.9%	£25*	£11,009	£9,009
£3,000	15.9%	£25*	£84,081	£81,081

* Or 3%, if it is the lower payment

Now that is truly scary. The figures show that, if you only paid £25 a month on your card for the next 25 years, even a relatively small debt of £2,500 will grow to almost £11,009, plus you would have paid £7,500 to MBNA over those years.

Meanwhile, £3,000 of debt will swell to £84,081, despite the £7,500 of payments.

And that's assuming the interest rate doesn't ever increase beyond 15.9% and you don't spend a penny on that card until 2031!

Good news......

But there is some good news. It's easy to ensure your credit card debt doesn't mushroom in the way I have described. Find out which cards offer the best 0% deals by reading 13 very long interest-free credit cards.

Don't delay. Leave the dirty dishes unwashed for 24 hours! Because if you don't deal with your debt today, you will find it a hell of a lot harder - and more expensive - to deal with tomorrow.

> Get a 0% Balance Transfer Credit Card via lovemoney.com