Halifax halve minimum repayments to just 1%

The banking group, which includes Halifax and Bank of Scotland and was recently taken over by banking giant Lloyds TSB, said that the move would 'ease the strain' on credit cardholders currently forced by their card's terms and conditions to make high repayments on their debts every month.

However, consumer groups are sceptical about how much easier drastically slashed minimum monthly repayments, which are explained here, would really make life for those in debt.

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What's the new rule?

As of the 1st of this month, new and already issued HBOS credit cards have been subject to the following rule, their minimum payment is now equal to:

1. 1% of the outstanding balance; or
2. an amount equal to the interest and insurance premiums charged, plus any penalty fees, plus £5

Even a fairly low APR of 13% charges more than 1% every month which means that the vast majority of HBOS customers will now be charged a minimum rate according to the second option, effectively only paying a little more than the interest on the debt every month.

So, in practice, with an APR of 17.9% (1.385% a month) and assuming no penalty fees or insurance costs that'd be:

• £100: £6.39
• £700: £14.70
• £5,000: £74.25

At those rates debts would take years to pay back.

Previously, HBOS credit cardholders had to pay at least 2% of their outstanding balance back each month.

The effect: 80-year debts

For the average HBOS cardholder with a £5,000 balance the result is that by only meeting the minimum monthly repayment their card debt will take 80 years to back in full.

During that period they could expect to end up paying over £30,000 in interest.

An official from the Halifax defended the new plan, however, saying that those with the highest interest rates would actually end up paying more: "This is mainly aimed at those customers on high interest rates to help them pay off more of the capital on their credit card."

But Simeon Linstead, from comparison website Uswitch denied that the change would be of benefit to consumers.

"On closer inspection, it doesn't seem that all customers will benefit from this change and some people would be better off under the old minimum repayment," he said.

In particular, minimum repayments are not a long-term solution to large credit card debts and could lead people to end up with an unmanageable debt.

Who isn't affected?

On the other hand, millions of HBOS cardholders won't be affected by the new minimum repayments rules.

Halifax say that just 11% of their cardholders regularly or occasionally make just the minimum repayment on their credit card debt but they couldn't tell us how many of those cardholders were using a 0% offer.

Using such offers to spread repayments means that making the minimum monthly repayment on some occasions doesn't make any difference to the amount of interest paid. As long as the whole balance is cleared at the end of the 0% introductory period.

Those who always pay their credit card balance off in full at the end of every month will also remain unaffected by the new minimum repayment rule.