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Credit card minimum payments – am I paying enough?

The minimum payment is one of the cornerstones of a credit card contract. It is a commitment by the customer to pay off an amount of the outstanding debt by a certain date each month. Failure to meet minimum payments can result in late payment fees and can void other parts of the contract such as 0% interest deals, so it’s vital you keep on top of them.

How do I know what the minimum payment is?

Your minimum payment will be clearly displayed on your statement, whether it’s online or on a paper statement. There will also be a date, by which you must make the payment. You can ask for it to be changed, for example to fit in with your pay day.

How is the minimum payment calculated?

There’s a legal commitment to charge a minimum of 1% of the outstanding balance plus any interest every month. Lenders also impose a fixed minimum fee, for example £5, for when the balance is low.

Each month you must pay at least the minimum payment in pounds sterling as shown on your statement.

This will be the greater of:

  • £25, or your whole balance shown if it is less, or
  • the interest, any default charges and annual card fee, plus 1% of the remaining balance.
  • the amount we tell you under section 9.2 of your terms.

The minimum payment must reach your account by the payment date shown on your statement.

Why pay more than the minimum?

Paying off just the minimum every month will mean that it takes longer to fully pay off the balance. That’s because you will only reduce the balance by a small amount, but then a large portion of the amount you pay off will be added to the balance in interest.

For example, if you pay off £5 then have £4 added to your balance in interest, the net payment is just £1. It becomes clear how long it would take to pay off £2,000.

If you pay more each month, you’ll be taking a bigger bite out of the debt. You’ll accrue slightly less interest next month, but more importantly the new interest payment will be a smaller proportion of what you’ve paid – meaning you’ll clear the debt sooner.

Budget wisely

If you took out a standard loan, you’d be tied to a certain repayment every month but you’d typically have the loan paid off after 12 months or two years. That’s because the monthly payment is much higher than 1% + interest.

It’s a good idea to set yourself a budget every month to get your card paid off more quickly. Treat your credit card like a loan and set yourself an amount you can afford to pay that’s significantly higher than the minimum. You’ll see the balance will drop quite quickly as the monthly interest will not come close to eating into your repayments.

Direct Debits

Many cardholders set up a Direct Debit to pay their monthly card bills automatically from their bank accounts. You can choose one of three amounts:

  • The minimum payment
  • An amount you decide
  • The full balance

Setting up a Direct Debit ensures you never miss your payment date as long as your bank account allows you to make the payment.

If you like, you can set up the Direct Debit to pay off just the minimum each month but still make extra payments manually. That means you have the safety net of paying no late fees but the flexibility to make larger payments which could help you pay your balance of more quickly.

When should I pay the minimum?

Everybody has months when their outgoings are higher than expected. Things like car or home repairs and large utility bills can take anyone by surprise and put a strain on your budget. At times like this, it’s okay to make just the minimum payment because you need the money for other expenditures. However, it’s important not to let it become a habit as that will increase the interest you pay and the time you take to repay your card.

Why is Virgin Money’s minimum payment £25?

Virgin Money likes to do things differently. We believe the minimum payments of many lenders are set too low, which leads to borrowers falling into the ‘comfort zone’ of treating £5 a month as sufficient to pay off their card.

Because of the way minimum payments work, they often kick in when balances are relatively low, and have the effect of dragging out borrowers’ debts for longer than is necessary.

Virgin Money believes that by committing to a £25 minimum payment each month, customers will get their cards paid off more quickly and pay less interest as a result. Most importantly, our customers seem happy with the arrangement.