97% of adults are clueless to the reality of how long £1000 of credit card debt, through minimum payments, would take to pay off.
Research carried out for SavvyWoman.co.uk, found only 3% gave the correct answer of 17 years. It takes someone 17 years to pay off a balance of £1,000 entirely, at the typical interest rate of 18% APR, if they only make the minimum payments, which are typically 2.5% of the balance. They would also pay an extra £1,200 in interest – more than the original debt.
The survey shows that people seriously underestimate how long it takes to pay off credit card debt, with 40% of adults believing it takes three or five years to clear the £1,000 of debt – a fraction of the 17 years it would actually take.
Official figures show that 1.6 million people are repeatedly making minimum payments on their credit card.
Over 2,000 adults were asked how long it takes to entirely pay off a £1,000 balance on a credit card charging a typical interest rate of 18% if they only make the minimum payments – in this example, 2.5% of the amount owed, so £25 a month initially. Respondents were given a range of answers from three to 25 years. The results are as follows:
• 17% of UK adults think it takes three years to pay off the debt (16% of men and 18% of women).
• 23% of UK adults think it takes five years to pay off the debt (18% of men and 27% of women).
• 15% of UK adults think it takes seven years to pay off the debt (16% of men and 13% of women)
• 21% of UK adults think it takes ten years to pay off the debt (22% of men and 19% of women).
• 5% of UK adults think it takes 13 years to pay off the debt (5% of men and 4% of women)
• 3% of UK adults correctly think it takes 17 years to pay off the debt (4% of men and 3% of women).
• 4% of UK adults think it takes 22 years to pay off the debt (5% of men and 3% of women)
• 13% of UK adults think it takes 25 years to pay off the debt (13% of men and 12% of women).
There are other concerns as well. One issue is that people that don’t monitor their credit card activity regularly are at a higher risk of identity theft. They must monitor it regularly to prevent these risks.
Sarah Pennells, founder of SavvyWoman.co.uk, says: “Over a million and a half people are only paying the minimum on their credit card balance, and they could be sleepwalking into over a decade of debt. You won’t be debt free for 17 years if you owe £1,000 but even a modest £500 balance would take almost 12 years to clear if you’re being charged 18% and are only paying the minimum.
“Credit card companies aren’t going to look out for you if you’re paying the minimum, because the longer you take to pay, the more profit they make from you. You don’t need to have a fortune to make a real difference to the repayment times. If you can double your payments on a £1,000 debt, so you pay an extra £25 a month, you’d be debt free in less than three years.”
Key age and regional stats breakdown are as follows:
• 1% of UK adults aged 18-34 correctly think it takes 17 years to pay off the debt.
• 26% of UK adults aged 18-34 think it takes five years (this was the most common answer in the age range).
• 5% of UK adults aged 35-54 correctly think it takes 17 years.
• 23% of UK adults aged 35-54 think it takes five years (this was the most common answer in the age range).
• 4% of UK adults aged 55+ correctly think it takes 17 years.
• 22% of UK adults aged 55+ think it takes 10 years (this was the most common answer in the age range).
• People in the East Midlands are most likely to give the correct answer (7%).
• Those in Wales are least likely to know, with just 1% believing it takes 17 years.
The FCA’s study of the credit card market earlier this year found that people who make the minimum payment are the most profitable for credit card companies and it also found that most firms do very little to help these customers.
Sarah concludes: “My challenge to credit card companies is to make it very easy for people to pay more than the minimum. Credit card companies could, for instance, put an example in the statements of how long it would take to clear the balance and they should also encourage people to pay extra by showing them how much they could cut their repayment times by.”
To find out more about the minimum payments on a credit card, see https://www.savvywoman.co.uk/8695/what-is-the-minimum-payment-on-a-credit-card-watch-out-for-minimum-payments