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Credit cards are not immune the harsh effects of the credit crunch. To keep credit card holders servicing their loans, many credit card providers have lowered minimum monthly payments to a tiny 1% - that's a 50% drop in what you have to pay every month. The lowest minimum ever…

Drop in minimum repayments:

Usually, credit card providers require card holders to repay at least a percentage of the balance or a set amount (whichever is greater). Since the 1980s, cards holders have seen this percentage drop from around 10% to 2%. Only repaying 2% (or £5) of your balance may seem like a sure-fire way to free up some cash, but let’s take a look at some timelines.

Let’s say a card holder is carrying a balance of £5,000 at an average interest rate of 12%. If the minimum repayment amount is 2% of the balance, the card holder must payback at least £100 every month. Keep in mind that there is the assumption that no more debt is added to this balance going forward.

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By paying back only the minimum £100 every month it will take almost 30 years to repay this debt in full! Not only will it take three decades to clear the debt, but the card holder will also pay £4,850 in interest. So, the original debt of £5000 will balloon to £9,850 over the repayment period.

Now let’s examine the effects of credit card companies lowering the minimum monthly payment to 1%. The minimum payment is now £50 per month and the original balance of £5000 will now take 50 years to pay off and bring your interest paid up to £30,000!!

Only making the minimum monthly payment may free-up some cash now, but will end up causing financial pain in the long run.

Cash Advance Charges:

A drop in minimum payments notwithstanding, credit card companies are now increasing the cost of privileged borrowing.

When times are tight, some card holders will borrow money against their credit card in the form of a cash advance. With that privilege there comes a cost. Credit card companies will charge the card holder an average of 2.5% of the amount of money advanced. So that means that for every £100 you advance from your credit card, you will be charged £2.50.

Some credit card companies have since raised this cost to 3% of the amount of cash advanced. This may not seem like much, but it is hike in the cost of credit.

Late Payment Fees:

If this isn’t enough to get card holders concerned, some credit card providers have also raised the penalty for late payments and over-limit charge.

Some of these charges have been raised by up to £4.00 (from £8.00 to £12.00) per instance.

Is the above just normal restructuring or is it a solid plan to ensure that credit card debt stays as high as it can for as long as it can?

The best way to ensure your financial survival is to pay back as much as you can afford to every month and try to avoid cash advances and late payment as much as possible.