Minimum payments (or just over?)

gglaze

Sure, clearly in the ranking of concerns on my credit report, I assume "total revolving balance" is a much bigger deal than "paying only minimum balance".

But assuming there's nothing I can do about that at the moment, i.e. let's say I have exactly £100 cash this month that I can dedicate to making credit card payments, and no more. And let's say I have the following:

Card A: 5,000 @ 0%, min payment=30
Card B: 4,000 @ 1%, min payment=28
Card C: 3,000 @ 19%, min payment=25

So we have £83 pledged out at a minimum, and £17 additional that we can use. We can use an extra £1 on A, £1 on B, and £15 on C. But already that is suboptimal economically, because those first £2 could have been put to reduce the 19% instead of reducing the 0% and 1% balances. We could do it proportionally to the rate, which I calculate would mean we put £0 to A, £0.85 to B, and £16.15 to C. We could split it evenly, so £5.66 to each of the three. etc, etc. Many possible strategies here, but it's about maximising both your payment to the most expensive credit, and the benefit to your credit report.

But perhaps in the longrun, the argument could be that, by paying the max (i.e. all £17) to the most expensive credit, we reduce the overall amount that we will have in balance, because that reduces the total interest that would be added to the total balance, and so not only do we have the max economic benefit, we also have the max credit report benefit in the end too.

Eydon

Your credit report also shows if you are currently on a promotional rate, so I would have thought (although I'm no expert) that someone who is paying the minimum amount and is on a promotional rate would not show up as a red flag to anyone.

Whenever I've been on a 0% I've always paid the minimum - no more, no less - and (so far) have never had any problem getting credit (famous last words).

Joe_Bloggs

Card A: 5,000 @ 0%, min payment=30
Card B: 4,000 @ 1%, min payment=28
Card C: 3,000 @ 19%, min payment=25

The monthly interest for an annual rate of 19% is (1.19)^(1/12) or 1.46%

1.46% of 3000 is 43.8. If you do not pay more than the minimum interest each month then the 3000 will increase each month. The illustration of the the 19% highlights the danger of consecutive high debt low interest rate cards. Better to adjust your budget spending plans to pay off all cards, highest interest first as there will come a time when they are all at double digit interest rates.
J_B.

gglaze

Yes, these are made up numbers - clearly the example is awfully contrived. ok let's imagine we double the min payment amounts and we have 200 to pay instead of 100. Just trying to illustrate the range of possible strategies.

Joe_Bloggs

The minimum repayment on a 0% card is typically 2.5-3% of the balance.
Card A repayment minimum at 2.5% would be 125 a month If the same applied to Card B then that's 100.
The Imaginary repayment schedule is initially 268 without overpayments.

J_B.

gglaze

That sounds slightly high to me - my average min repayment accross all my cards has always been between 1.7% to 2.5%, but usually just under 2%. On my 0% Virgin MBNA card it was always right at 1%, while the highest has typically been 2.25%, on both Opus (previously Citi) and Barclays. Maybe I've just been lucky..

gglaze

What a funny coincidence, I just got one of these emails from Barclays today:

The financial services industry is committed to doing all it can to ensure credit card customers are provided with the best advice to help them manage their accounts. As part of our commitment to our customers, we're writing to you as we've noticed you've been paying just above the minimum amount of your outstanding balance on your Barclaycard for the past 6 months. If you're happy making just above the minimum payment each month, that's perfectly okay.

We just wanted to remind you that if you increase your monthly repayment, you'll pay less interest and reduce your outstanding balance more quickly.

Joe_Bloggs

@gglaze

Card A: 5,000 @ 0%, min payment=30
Card B: 4,000 @ 1%, min payment=28
Card C: 3,000 @ 19%, min payment=25


There are credit card snowball calculators.
http://www.makesenseofcards.com/snowcalc.html

http://www.whatsthecost.com/snowball.aspx

These require the end date of any introductory interest rate and the follow on rate to complete the picture. The term snowball in the circumstances of these payment calculators involves paying more than the minimum to certain cards to minimise potential interest. A bigger potential rate on a 0% card does tend to suck in overpayments.
Try your luck.

My estimate of 2.5% per month minimum repayment is rather close to
1% of balance plus interest at 1.46% per month (19% per annum). This is useful info when these calculators only work with a single monthly percentage.

J_B.

redpete

I think that thinking about payment strategies in such detail is pointless. Different lenders will view different payment patterns differently - the raw data they get from the credit rating agencies might show that only minimum payments are being made but I doubt very much that a lender will have such sensitive criteria that paying over the minimum by £1 or £10 makes any real difference.

But perhaps in the longrun, the argument could be that, by paying the max (i.e. all £17) to the most expensive credit, we reduce the overall amount that we will have in balance, because that reduces the total interest that would be added to the total balance, and so not only do we have the max economic benefit, we also have the max credit report benefit in the end too.

That makes more sense to me than building complex spreadsheets to work out how to allocate payments in any other way.

Joe_Bloggs

If you ignore the mathematical approach then you lose perspective on how long it will take to clear the debt. Future predictions for the eventual repayment of the debt are a useful tool in budgeting for the future.
J_B.