Topic Consumer protection Regular credit cards: How you can avoid high interest payments
Buy now, pay off in many small instalments: you can do this using credit cards with a partial payment facility. You can easily make use of the partial payment function if you have a regular credit card like this. However, the products on offer differ greatly – also in terms of potential risks. You can find out here what you should be looking for.
First things first
- The credit card’s partial payment function means you are using a credit card loan. This loan costs money, so you will have to pay interest.
- The partial payment function means that, if you do not take action, you often pay a small minimum instalment, meaning a single-digit percentage of the loan amount. This means you repay very slowly and the interest can add up to large amounts. This effect increases the higher the interest rates on the loan.
- Choosing fixed instalments – as high as possible – means you will pay off your loan debt more quickly. The loan will then cost you less.
- Residual debt insurance (also known as payment protection insurance) is often offered as standard with credit card partial payment arrangements. It kicks in if you die, become unemployed or are unable to work, depending on what has been agreed in the contract. You should carefully check whether the residual debt insurance offered with the relevant credit card loan suits your needs – just like the credit card terms and conditions.
What types of credit card is this about?
There are different types of credit card. With charge cards (also known as delayed debit cards) and regular credit cards, card payments are collected in a credit card account over a certain period of time and settled regularly, usually at the end of the month.
With charge cards, cardholders must settle the amount on the credit card statement in full when it falls due. The accumulated amounts are deferred until the due date of the credit card statement. Interest is not normally charged if payment is made on time.
With regular or “revolving” credit cards, however, cardholders can repay the balance on the credit card statement in instalments/partial payments. If you make use of this option, you are taking out a credit card loan. You will have to pay interest on this loan regularly. An option to pay in instalments is already available by default for some of these regular credit cards. With others, you can activate them by tapping or swiping in the app, for example. You can also do this retrospectively after you have already made a purchase with your credit card.
Not all credit cards with a default setting for partial payments will allow you to switch from partial to full payment at any time. Check the default settings and change options before deciding in favour of a credit card with a partial payment function.
What does “partial payment” mean?
When the credit card bill is due, you do not pay the full amount, but only part of it. The partial payment (instalment) contains the repayment portion and the interest.
There are generally two options for the instalment:
- partial payments/instalments calculated on a percentage basis or
- fixed monthly instalments.
In addition, you can usually reduce your outstanding credit card debt at any time by making a payment to your credit card account.
In most cases, you can decide the instalment amount yourself. Minimum instalments are often specified. They are the minimum you have to pay each month. These minimum instalments, which include repayment and interest, are often two, three, five or ten per cent of the outstanding credit card balance. This means that at least 90 per cent of the loan amount is still outstanding after the payment.
There is a lower limit for minimum instalments. This means that you agree a lower limit – for example, an amount between fifteen and fifty euros as the minimum amount. If the percentage calculation results in less than the minimum amount specified for the lower limit, you will still have to pay this minimum amount.
Interest and costs
The terms and conditions for credit cards with instalment payments vary greatly. You do not have to pay an annual fee for many products. However, the other terms and conditions are often quite a hurdle.
The range of interest rates charged for instalments is wide. The stated annual percentage rate for the most expensive card products is almost 25 per cent and is therefore (as at January 2024) almost three times higher than the average interest rate charged by (savings) banks for instalment loans to private households (i.e. private individuals and non-profit organisations) as calculated by the Deutsche Bundesbank. You will also often pay lower interest rates for arranged overdrafts than for credit card loans.
The effective annual interest rate: the most suitable factor for comparing loans
Different interest rates are quoted for loans: the borrowing rate and the effective annual interest rate. Whereas the borrowing rate takes into account the repayment terms, in particular, the effective annual interest rate has to include additional other costs or fees. The effective annual interest rate is therefore generally more revealing than the borrowing rate when comparing loans, and it is particularly suitable for comparing very different loan products. If you only want to compare the partial payment option of various regular credit cards, the borrowing rate can provide a good starting point. In the second step, you should also compare loans based on the effective annual interest rate for the loan amount and repayment type you need. It is important that you always compare the same interest rates, i.e. borrowing rate with borrowing rate or effective annual interest rate with effective annual interest rate.
The time when interest begins to accrue can vary. For example, some credit card terms and conditions stipulate that interest is payable on cash withdrawals abroad starting on the transaction date.
If you miss due dates or are unable to pay instalments when they fall due, high interest on arrears and potentially also high collection costs are often added to the loan interest.
In most cases, residual debt insurance is offered with a credit card loan. This allows you to insure repayment of the loan in certain cases. Depending on what you have agreed, the insurance will continue to pay if you die, become unemployed or unable to work during the term of the loan. A premium is charged for this cover. Read the insurance terms and conditions carefully and analyse your insurance needs critically. Please note: the insurance premium is only required to be included in the effective annual interest rate of the credit card loan if you cannot get the credit card loan without the insurance. It is never included in the borrowing rate.
The risks behind minimum instalments
The repayment instalment consists of the repayment and interest. Only the repayment portion reduces the outstanding loan amount.
When interest rates are high, the interest portion of the instalment is generally high and the repayment portion correspondingly low. Especially with low instalments, high interest rates mean that you will only pay off the outstanding loan amount very slowly. As a result, interest can add up to a considerable amount relative to the loan amount. This applies equally to fixed instalments and percentage-based instalments.
With percentage-based instalments, you pay a little less each month than in the previous month. This is due to the calculation formula. As a result, it will take you longer to pay off the loan and you will pay much more interest than with fixed instalments.
Example
The credit card balance (debit) is EUR 1,500. The borrowing rate is 20% per year. The minimum instalment is 3% of the credit card balance, with a minimum of EUR 30. The instalments are paid monthly at the end of each month. Interest is calculated on the basis of the amount outstanding at the beginning of the month, i.e. after payment of the previous month’s instalment.
The customer has decided to pay the credit card bill in instalments and does not use the credit card during the credit period. They pay the outstanding credit card balance
- in fixed instalments within one year (scenario 1),
- in fixed instalments of EUR 45 per month (scenario 2) or
- in minimum instalments of 3% of the outstanding balance, but at least EUR 30 (scenario 3).
They do not change the repayment terms until full repayment and do not make any payments into the credit card account.
The various repayment instalments have the following effect on the term and the interest cost:
| Scenario 1 | Scenario 2 | Scenario 3 | |
|---|---|---|---|
| Credit card balance (outstanding) | EUR 1,500 | ||
| Interest rate (borrowing rate) | 20% per year | ||
| Instalment amount | EUR 139 fixed | EUR 45 Euro fixed | 3% of the outstanding balance (first instalment EUR 45) |
| Term until full repayment | 12 months | approx. 49 months | approx. 80 months |
| Total cost | approx. EUR 1,670 | approx. EUR 2,210 | approx. EUR 2,597 |
| davon Zinsen | approx. EUR 170 | approx. EUR 710 | approx. EUR 1,072 |
What this means here is that, with minimum percentage-based instalments (scenario 3), you will be repaying the loan amount over a period of around six and a half years and will pay more than six times the interest compared with repayment in fixed instalments within one year (scenario 1). If you make fixed monthly payments of 3% of the original credit card balance (scenario 2), you will have to spend around one-third less on interest than if you pay the minimum instalments.
For example, if the borrowing rate is only 9% instead of 20% and the instalment is fixed at EUR 45, as in scenario 2, it will you take around 39 months to repay the loan in full. The total cost will then amount to around EUR 1,733. This includes interest of around EUR 233. If you increase the instalment to a fixed EUR 139, as in scenario 1, you will finish repaying in around eleven months and have an interest cost of around EUR 70, i.e. a total cost of around EUR 1,570.
Do this to avoid high interest rates
- It pays to compare
If you compare loans and also look at different types of loans, you can usually find (more) affordable loans. If you decide on a regular credit card loan, you should note the following: - Repayment in fixed instalments instead of minimum percentage-based instalments
Use the option to pay fixed instalments instead of percentage-based instalments. The advantage is that you pay off the loan more quickly, the term of the loan is shorter and you pay less overall. In addition, fixed instalments are easier to plan into your monthly budget. - Repay, repay, repay
The faster you pay off the loan, the cheaper it will be. Keep this in mind when deciding on the instalment amount. Take advantage of opportunities to make additional deposits into your credit card account as soon as you can spare the money. - Avoid transfers from the credit card loan to your current account
With some credit cards, you can make transfers from the credit card limit to your current account. You usually have to pay interest for this – some providers even charge interest from the date the amount is transferred (transaction date). Bear in mind that you will have to pay interest on the transferred amounts – which is often more expensive than the credit card loan. - Find out whether it might make sense to switch to a different loan
If you use a credit card loan on more than just a temporary basis, you should review it regularly. In particular, if the outstanding balance is considerable in relation to the payments you make monthly and/or the interest on the credit card loan is comparatively high, you should consider switching to a different loan. - Don’t combine partial payments with other buy-now-pay-later offers
Like other credit card types, credit cards with a partial payment option can usually be used as a payment method with buy-now-pay-later payment providers. These products allow you to combine various loans or to combine loans with monthly bills, instalment payments, etc. and defer payments even further. However, multiple deferrals can be expensive. You will have to pay any interest for the buy-now-pay-later payment method you select in addition to the credit card interest.
One important thing to remember about all loans: plan your budget. Always try to keep track of what you have already paid and what amounts are still outstanding, and manage your spending accordingly.
