A MAJOR high street bank is slashing credit card repayment rates from today, reducing minimum monthly payments for millions of customers.
But, experts have warned that customers could end up unwittingly paying back thousands of pounds more as a result.
Barclaycard is making a raft of changes to how it calculates the minimum monthly repayments customers must make on their credit card bills from today (July 22).
It will be changing from a tiered structure, where customers have to pay anywhere between 2.25% and 4.25% of their overall balance, to one that calculates repayments based on individual customer’s circumstances.
From today, customers’ minimum repayments will be the highest of the following each month:
The new structure will apply to all Barclaycard customers, resulting in 80% of customers’ minimum monthly repayments either being reduced or staying the same.
Barclaycard has said it is “making the changes to give you greater flexibility each month”.
It added that someone with a balance of £5,000 today would have paid £179.92 if they made the minimum payment every month, while from today they could pay as little as £142.42.
While many customers will feel some light relief from the changes in the short-term, experts have warned that paying less in minimum repayments means you could end up paying more long-term.
This is because more interest will end up being applied to your outstanding balance as less is being paid down each month.
Martin Lewis, founder of MoneySavingExpert.com, said: “Minimum repayments have always been credit card firms’ secret weapon.
“Letting people repay little looks appealing – hence why Barclaycard says this is about ‘flexibility’.
“Yet it takes flexibility to kick your own backside, and this will hurt some just as much.
“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.”
Lewis has claimed that reducing monthly repayments “can easily double the cost of your debt… meaning you pay hundreds or thousands of pounds of more”.
Barclays has more than 36million customers including both current account and credit card users.
This means millions of customers will be affected by today’s changes.
Under the new terms a customer with a £5,000 balance currently paying £179.92 with an APR of 29.9% – which Barclaycard says is the rate offered to most customers – would clear their balance by December 2027 and pay £2,824 in interest in total.
If they reduced their minimum payment to £142.24, they would not clear the balance until January 2030 and would end up paying back a huge £4,709 in interest.
Sarah Coles, head of personal finance at broker Hargreaves Lansdown, explained: “Minimum credit card repayments can lull borrowers into a false sense of security.
“Just because the minimum is affordable, they might think they’re on top of their credit card debts.
“However, just paying the minimum can mean you carry this expensive debt for years or even decades, and pay a small fortune in interest.”
Barclaycard customers will still be able to pay more than the minimum repayments each month if they wish to, either by setting up a fixed direct debit or standing order, or by making individual payments.
Barclaycard will also be changing how much APR it charges some customers.
APR is the total interest rate you pay back over the course of a year, so an increase to a customers’ APR means they will end up paying more back in interest.
While Barclays said the majority of customers will see their APR stay the same or go down, 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% of them will have less than £10 added to their monthly interest.
Customers began being notified about the change to repayments in March and everyone has been given at least 60 days’ notice.
In the letter to customers, Barclaycard said: “We wanted to let you know that we’re changing the way we work out your minimum payment on your card from July 22 2024. This means the minimum amount you pay each month will go down,” the letter said.
“We’re making these changes to give you greater flexibility over how much you pay each month.”
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.
Earlier this month Barclays announced it was offering £175 in free cash to those who wish to switch to its current account service.
If you use the Barclays app to switch to an eligible bank account by August 30, you could be in line for the cash payment.
Banks and building societies regularly offer switching incentives to entice customers to move your bank account, so its always worth checking what’s available.
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 really 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 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.
Ms Coles said: “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.”
Remember that banks can always increase the minimum repayments they demand each month too, so factor this in before taking on credit card debt.
There are several groups which can help you with your problem debts for free.
You can also find information about Debt Management Plans (DMP) and Individual Voluntary Agreements (IVA) by visiting MoneyHelper.org.uk or Gov.UK.
Speak to one of these organisations – don’t be tempted to use a claims management firm.
They say they can write off lots of your debt in return for a large upfront fee.
But there are other options where you don’t need to pay.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
Plus, you can join our Sun Money Chats and Tips Facebook group to share your tips and stories
