Is there a downside to making only minimum payments on an interest free debt?

MikeyPGT

I have a longstanding debt with Capital One which I have been paying down gradually over many years.  With a remaining balance of around £2750 they have now written to me and advised that they will no longer be adding interest or charges and, so long as I continue to make minimum payments, will not count against my credit score.  The minimum payment is 1% of the debt. I reckon it will take over 7 years to pay off at the minimum payment.

Is there any disadvantage in taking the whole 7 years to pay it off?

Apologies if this has already been answered previously ...

Mr.Generous

7 year interest free loan, only downside is you'll get sick of seeing the payment and still having the debt.

Mark_d

Paying down your debts is a good idea if you're looking to take out significant borrowing, such as a mortgage

HillStreetBlues

MikeyPGT said:

I have a longstanding debt with Capital One which I have been paying down gradually over many years.  With a remaining balance of around £2750 they have now written to me and advised that they will no longer be adding interest or charges and, so long as I continue to make minimum payments, will not count against my credit score.  The minimum payment is 1% of the debt. I reckon it will take over 7 years to pay off at the minimum payment.

Is there any disadvantage in taking the whole 7 years to pay it off?

Apologies if this has already been answered previously ...

If you only pay 1% of the debt each month even with a min payment of £5 it would take over 22 years to pay off the debt.

MikeyPGT

HillStreetBlues said:

If you only pay 1% of the debt each month even with a min payment of £5 it would take over 22 years to pay off the debt.

Good point - I'd calculated the 7 years on making a payment of around £30 a month but of course the actual minimum payment would reduce each month as the balance reduced ...

MikeyPGT

Mark_d said:

Paying down your debts is a good idea if you're looking to take out significant borrowing, such as a mortgage

Sadly the wrong side of 60 to be looking at a mortgage and not looking too bright on the affordability assessment for loans until the state pension kicks in (June 2027) and my income increases by two thirds ... 

HillStreetBlues

MikeyPGT said:

HillStreetBlues said:

If you only pay 1% of the debt each month even with a min payment of £5 it would take over 22 years to pay off the debt.

Good point - I'd calculated the 7 years on making a payment of around £30 a month but of course the actual minimum payment would reduce each month as the balance reduced ...

One way of looking at it is a challenge, to see it you pay it all back at 1%

fatbelly

Your credit files will probably be marked Arrangement to Pay. For many that is a downside.

If the arrangement takes 30 years to get to zero, then the mark stays visible for 36 years as entries are only removed 6 years after defaulted or settled, whichever happens sooner

DullGreyGuy

MikeyPGT said:

I have a longstanding debt with Capital One which I have been paying down gradually over many years.  With a remaining balance of around £2750 they have now written to me and advised that they will no longer be adding interest or charges and, so long as I continue to make minimum payments, will not count against my credit score.  The minimum payment is 1% of the debt. I reckon it will take over 7 years to pay off at the minimum payment.

Is there any disadvantage in taking the whole 7 years to pay it off?

Apologies if this has already been answered previously ...

They cannot promise this, in the UK each lender has its own decision making process which may or may not involve a "score". If it does have a score it's certainly not the score that the CRA marketing department will try and sell you. They dont even know who you'll apply for credit from in the future let alone how that firm calculates their decisions.

The question to ask them is if they will mark your credit file as an "arrangement to pay", if they will then that certainly will impact your ability to get credit from some other lenders. If they won't then it becomes impossible to say because that will come down to other lenders appetite.

I'd confirm with them if they really mean 1%, ie an ever decreasing number in which case it will take you 22 years to pay it off or if they mean £27.50 fixed repayment.

CliveOfIndia

MikeyPGT said:

so long as I continue to make minimum payments, will not count against my credit score.

It may or may not affect the score you see on your credit report - but since that score is meaningless (it's not even visible to other lenders), then it's irrelevant.

The important issue is that you'll have an Arrangement to Pay marker on your file, which will be visible to lenders.

This, and the length of time it remains on your record (as explained by fatbelly above) may be something you want to bear in mind if you foresee the need for further credit at some point in the future.

MikeyPGT

Thanks to all that have commented to date.  So far I've only had one bill since the new arrangement kicked in and that was definitely a 1% of the outstanding balance minimum payment (previously it had been 1% plus the interest due).  My gut feeling is to pay it off at £30 a month and take advantage of the free interest rate.  I'll keep an eye on my credit scoring - even though I know it is of limited value - and see if it changes at all.  I don't really have any plans for major future investment requiring additional borrowing so that much is hypothetical I guess ...