Credit cards, when used strategically, can be a convenient and flexible way to pay for things. As a card user, you simply use pre-approved credit to tap or swipe for your purchase and pay for it later.
Credit cards also offer more protection for online purchases than debit cards. If, for example, a package you ordered is lost, stolen or damaged, the credit card’s purchase protection insurance kicks in. Westpac, for example, covers you for up to four months of purchases on eligible items, though you should always check the terms and conditions of your specific card.
However, with every purchase you make via credit card, you get further indebted to the bank. You need to understand how payments work if you plan to use and not abuse your credit card.
Credit card repayments 101
Credit cards are accompanied by a monthly statement showing the amount owed on the card. A credit card billing cycle is usually 30 days and is called your statement period. The statement details all the transactions that occurred within the period of that particular statement.
Your card issuer will send you a paper or digital statement depending on your preference, though most banks should automatically alert you of a new statement via online banking. Recent statements are available to download and you should be able to access statements that are a year old or more by contacting your bank.
You can repay the figure in full to avoid interest; simply pay the minimum amount on your statement or make a partial payment. For example, if you owe $1,000 you can either pay the full amount, settle the minimum (which might be $20) or repay any amount in between.
Minimum, partial and full repayments
The easiest way to pay your credit card bill is by making minimum repayments. The catch is, by only paying the minimum amount due, it could take years, decades even, to get out of debt as your interest accumulates.
Pros: You pay less now so you can put your money toward other expenses or purchases.
Cons: You’ll carry the debt for longer, which includes paying extra interest on your debt over time.
You can choose to pay anything between the minimum due and the full amount. There’s no right or wrong figure, but any extra amount you can put toward the outstanding debt is helpful. A few dollars can go a long way to reducing your total time in debt and the amount of interest you pay over a longer period. You can also make multiple partial payments.
Pros: You have more control over when you’ll repay the credit.
Cons: You might not have extra funds to dedicate to other financial responsibilities. You’ll still pay interest.
Paying the full balance
If you can afford to, this is the best way to treat credit. Use it to make purchases during the month then pay off the entire balance by the due date. This way, you can use your credit card without paying interest.
Pros: You’ll avoid interest payments.
Cons: To guarantee full payment every 30 days, you might need to keep the card limit lower.
A word of warning on interest-free payments
‘Interest-free’ credit card rates apply to people who take advantage of balance transfers, where you transfer the balance of your debt from one lender to another. For those who signed on with a balance transfer at either 0% interest or a low rate, there’s still a monthly credit card payment on the balance transfer, however. The low rate usually lasts for up to two years.
Paying attention to the monthly bill is extremely important for those with a balance transfer – as the interest-free terms are predicated on honouring the repayments. To make the most of the promotional period, consumers should make additional payments during this time.
The golden rule for a credit card? Pay it off.
Remember, banks make money from credit cards. The longer you have one, especially with an outstanding balance, the more money they make. Keep this in mind when reading your statements and making repayment decisions.
As long as you make the minimum payment, the banks are happy. But for you as the consumer, you should aim to make frequent repayments. If you can pay your credit card off early and it doesn’t affect your ability to pay your other bills, you should do it.
If you have an extra $50 or $100, you can make a voluntary credit card payment. Remember, you have the freedom to pay off your card whenever you like and there are no maximum limits for repayments.
Where and how to make a repayment
You have plenty of options for paying your credit card bill, namely via online banking (preferably via the bank’s mobile app).
Pick an account for the auto payment to come from every month – just make sure that account doesn’t drop below a certain amount to avoid overdraft fees. You can do this manually or by setting up autopay, so you don’t have to rely on memory.
If you’re paying your credit card bill from a different bank than the one that issued your credit card, you can set up a recurring direct debit. Check with your bank if the autopay can go straight to a credit card or if it needs to go via an everyday account.
Some people like to pay over the phone to speak to someone for additional support, and you also can go to your local branch and settle the bill in person.
When a repayment isn’t possible…
While it’s tempting to want to hide under a rock and wish away your credit card debt, be proactive if you do find yourself in a bind. It may feel like it, but you’re not alone. Taking action and creating a repayment plan can help alleviate financial problems now and in the future.
Reach out to your bank first. There are people on the end of the line who help many Australians in your shoes. Discuss new terms for dealing with the debt and know exactly what you owe. Get emotional support from someone you trust, as well as professionals. The National Debt Helpline is a free, confidential source of practical and emotional support.