MONEYSAVINGEXPERT Martin Lewis has issued an urgent debt warning for millions of customers from a well known firm.
The alert comes after The Sun previously revealed the credit card provider is this month overhauling repayment structures for customers.
Martin Lewis‘ warning comes as the changes kick in next week.
Barclaycard is changing minimum repayments from a tiered structure, where customers may have to pay between 2.25% and 4.25% of their overall balance, to one that calculates repayments based on each customer’s circumstances.
Martin’s team at MoneySavingExpert.com has worked out the changes means that it will now typically take you a decade longer and cost you nearly £1,000 more than it did before to clear a £1,000 debt, fuelling concerns over debt.
The team said: “If you’re unaware and pay interest (so aren’t on a 0% deal), and don’t act, you could stay in debt for many years longer and pay possibly £1,000s more in interest.”
From July 22, customers will pay the highest of the following each month:
Under the new structure it is understood that 80% of Barclaycard customers will see monthly repayments either reduce or stay the same.
This may seem like good news, but could mean that many customers will pay off balances more slowly and therefore pay far more in interest.
Reacting to the news, Martin Lewis, founder of MoneySavingExpert.com, said it a “worryingly under-the-radar change” by the UK’s biggest credit card provider.
He added that it’s likely most customers will ignored the communications about it.
But the “seemingly technical and bland change is a huge danger signal” and that customers can see the total cost of debt double by the time they clear what is owed.
He explained that minimum repayments have always been credit card firms’ secret weapon.
And added: “Letting people repay little looks appealing – hence why Barclaycard says this is about ‘flexibility’.
“Barclaycard’s reduction, for many, from 3.75% of the balance to 1% of the balance – means while people’s repayments will cover their interest, they will clear far less of what they owe, prolonging the debt, keeping people indebted year after year after year, and the interest racking up year after year after year.”
The bank will also be changing how much APR it charges some customers.
APR is the total interest rate you pay back over a year, so an increase in a customer’s APR means they will pay more interest.
Barclays said customers will see their APR stay the same or go down but The Sun understands some customers on “historic rates” will see an increase to their APR of up to 9.9 percentage points.
However, customers affected will still pay lower rates than new Barclaycard customers, and 97% will have less than £10 added to their monthly interest.
Barclays has more than 36million customers, including current account and credit card users.
This means millions of customers will be affected by the changes from July.
A spokesperson for Barclays previously told The Sun: “We regularly review our products and from July, some Barclaycard customers will see changes to their minimum monthly payments, alongside adjustments to the APR.
“Customers will benefit from a reduction in their minimum monthly repayment and the vast majority have no change to APR, while some will receive a decrease.”
ANALYSIS by Consumer Reporter, James Flanders:
Barclaycard’s change to its credit card repayment structure sounds great if you don’t dig into the details.
After all, Barclaycard says it’s “making the changes to give you greater flexibility each month”.
In practice, it means that if you can’t afford to pay off your balance in full at the end of each statement period, you can repay much less under the minimum repayment option than you have done previously.
If you only pay the minimum amounts on occasion, this is super useful.
But if you rely on this type of repayment plan in the long term, it could will cost you hundreds of pounds extra in interest.
It could also negatively affect your credit file as it’ll take you much longer to clear your debt.
More interest will be applied to your outstanding balance, too, as less is paid down each month.
For example, if you have a balance of £5,000 on a Barclaycard at 24% interest, where you only make the minimum payments and don’t spend on the card.
Under the old “2.5% of the balance plus the interest charged” rule, it would take around 14 years to clear the balance.
In total, you’d expect to pay about £3,500 in interest.
But with the new “1% of the balance plus the interest charged” calculation, it will take over 30 years to clear the same balance.
You’d then end up paying a whopping £8,500 in interest.
Before taking out a new credit card or increasing the amount you borrow, it’s vital to consider the consequences.
You should only borrow money if you can afford to pay it back.
It’s always vital to ask yourself if you actually need to borrow before committing to a new credit card, personal loan or overdraft.
If you use a credit card, I’d recommend that you always pay off your balance in full at the end of each statement period.
Lenders have a responsibility to help customers who are in debt.
If you’re in a debt crisis, your first point of call should be your lender.
They might help you out by offering you a reduced interest rate or a temporary payment holiday – so check in with your lender if you’re struggling.
The minimum credit card repayment each month is the minimum amount you can pay off your outstanding balance without being hit with late fees or a poor credit rating.
This is usually a percentage of your overall statement or a specific amount, whichever is greater.
It’s important to pay at least the minimum repayment amount each month to avoid damaging your credit score or racking up additional charges.
But experts warn that only paying the minimum can lead to paying back far more to the lender than you borrowed due to the interest added.
So, if you can afford to pay extra you will be saving yourself cash long-term.
The best way to avoid interest altogether is by paying off your total credit card balance every month. By doing this you won’t be charged any extra fees.
Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “If you’re carrying credit card debts, don’t stick to the minimum repayment.
“Draw up a budget, work out where you can squeeze a little extra cash from your spending, and pay your debts off as quickly as you can afford.”
Banks can always increase the minimum repayments they demand each month too, so factor this in before taking on credit card debt.
