Cardholders paying just the minimum repayment could end up deeper in debt

Cardholders who pay just the minimum repayment each month could find themselves deeper in debt, a member of the Commons Treasury Select Committee said this week.

Norman Lamb, Liberal Democrat MP for Norfolk North, says that cardholders with payment protection insurance and low minimum repayment rates can find their debt growing if they pay just the minimum. "The Government has failed to recognise that consumers could still end up with a rising debt when making minimum repayments. This must be addressed either through industry self-regulation or government action. The DTI has simply accepted Apacs?s assertion that no credit card company offers a minimum repayment rate that is less than the interest accruing on the card balance. This does not describe the full picture."

Mr Lamb uses the example of a credit cardholder who pays an interest rate of 18.9 per cent and has bought payment protection insurance (PPI) of 73p for every £100 outstanding. If he made a minimum repayment of 2 per cent on an outstanding balance of £1,000, the cost of interest charges, plus PPI, is £21.86, £1.86 more than the monthly minimum repayment of £20.

Sandra Quinn, of Apacs, says: "Customers do not have to take out PPI when they have a credit card. We do not suggest that they rely on minimum repayments to clear debts. It is is simply an option people can use if they need to."

The committee has called for credit card companies to display warnings on statements of the 'financial implications' of making just the minimum repayment. MPs want issuers to explain clearly how long it takes to repay a card debt at just the minimum.