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Are minimum payments costing you money?

There are many great advantages to using running account credit products over straightforward loans. For example:

And while these are very time-efficient and super helpful in resolving the immediate cashflow shortfalls you face from time to time; you might be paying more to borrow if you only make your minimum payments each month.

What are minimum payments?

Minimum payments are a function most commonly associated with credit cards and credit lines. They are designed to help people in temporary financial difficulty meet their financial commitments without exacerbating their situation. A minimum payment is, as the term suggest, the minimum amount you can pay towards your borrowing to prevent the account from becoming overdue.

Your minimum payment will vary across providers and can be a percentage of the amount borrowed or a set repayment each month. A minimum payment for a Polar Credit line includes any transaction fees, the interest that’s accrued during your statement period and the higher of £10 or 5% of the principal amount borrowed. It will also include any default fees or overdue repayments from previous months so it’s important you make your minimum payment on time.

You can find out how your minimum payment is calculated by looking in your credit agreement or getting in touch with your lender.

Benefits of Minimum Payments

There are plenty of benefits to being able to repay only the minimum payment. It’s great for those odd occasions where your monthly income just won’t cover all your bills – for example, if you had to take a few days off work and so your payslip is smaller than usual.

It can also help reduce the stress that comes with managing your finances if you know you can pay a small contribution rather than the full balance. While you might be trying to practise good money management skills, sometimes an unexpected bill or an annual payment can be unavoidable, and so having the flexibility of minimum payments can actually increase your ability to meet your financial commitments.

Disadvantages of Minimum Payments

However, there can also be some drawbacks to only paying your minimum payment every month. The most obvious reason is that if you only make a small repayment each month, it’s going to take you much longer to repay the full balance.

It also means that if you need access to funds quickly because maybe you’ve had an emergency expense, you might not have repaid enough of your credit limit to withdraw the funds and cover the emergency payment. This means you might have to seek alternative borrowing which in turn, increases your expenditure the following month.

Additionally, because most revolving credit products charge interest, interest will continue to accrue on your balance regardless of how much you repay (unless you repay the balance in full). Only repaying a minimum payment each month might mean you end up paying more for your borrowing.

If you find you are increasingly struggling to make even your minimum payment, you might need to seek advice on how to manage your debt. You should always aim to reduce the principal amount you owe on any loan or credit product when you make your repayments.

Financial Difficulty

Asking for advice when it comes to debt is not as scary as it sounds. There are several free and impartial debt advice services that will offer you advice based on your individual circumstances and financial situation. You should never be borrowing money to repay another debt, and this is sometimes a good indicator that maybe you’re in financial difficulty.

However, if you know your situation is only temporary and that your financial wellbeing is on the path to improvement, then maintaining a good relationship with your creditor through times of shortfall is important. So make sure you make every effort to repay at least your minimum payment each month, especially if you have the intention of repaying the balance in full in future so that you know you have access to fast cash when you need it most.

More information

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