Credit card firm to raise minimum payment

CREDIT CARD company MBNA is to increase the minimum payments customers must make each month in a move that will push borrowers to clear their debts more quickly.

From April 29th, MBNA customers will have to repay at least 1 per cent of the principal loan balance on their credit card, plus any interest, fees and charges. Currently customers have to repay €25 or €7 plus interest, charges and payment protection insurance, whichever is greater.

Customers who pay the bare minimum off their credit card each month could face a considerable hike as a result of the change, particularly if they have run up large balances. For example, an individual with €5,000 on their card could potentially see their minimum monthly principal repayments (excluding interest, charges etc) rise from €7 to €50.

Over the longer term this will benefit borrowers as they will become debt-free more quickly and therefore pay less interest.

MBNA is one of the top three card providers in the State – along with AIB and Bank of Ireland – and has about 500,000 customers here. The company says only a small minority of cardholders will be affected by the change as most people clear their balance each month.

The new method of calculating minimum repayments is already being applied to MBNA accounts opened since mid-2009. In April it will be extended to its “back book” of existing customers.

However, a spokeswoman for the company said that if a particular customer was already behind on their payments MBNA would not push them into further difficulty by enforcing the new minimum repayments.

“We have chosen to strike a balance between ensuring our customers are able to save interest and pay their balances quicker but at a limit that minimises the impact on customers that may be experiencing financial difficulties,” said Will Curley of Bank of America, which operates the MBNA brand.

MBNA wrote to all of its Irish customers this week informing them of the change, which will be reflected in their credit card statements from May onwards.

The credit card provider has also announced plans to change the way payments are allocated against their customers’ credit card debts.

Different interest rates apply to different types of card transactions and until now MBNA has first allocated payments against that portion of the customer’s debt attracting the lowest interest rate.

However, from April the company will reverse this and use payments automatically to pay off debt carrying the highest charges first. That means many customers could pay less interest over time, it says.

“The change...provides clarity to the way payments are allocated to customers’ accounts as the method we use is a straight high to low allocation of payments,” Mr Curley said.

Recent statistics indicate that consumers are changing the way they use credit cards, preferring to clear old balances rather than incur fresh debts. Figures from the Central Bank show that the level of outstanding personal credit card debt fell by €123 million, or 6.3 per cent, over 2010.