Your bank issues a credit card statement every month, and it includes the minimum repayment amount due.
The longer you hold credit card debt, the more lucrative you are to your bank. And with credit cards, the onus is on you, the consumer, to pay down the debt as fast as possible.
What is the minimum payment on a credit card?
The minimum payment is calculated as a percentage of the closing balance. The bank sets this amount, based on what you owe and is approximately 2% of the outstanding debt or a flat dollar amount, usually $20. Using the 2% rate as a guide, you can estimate what your next bill is likely to be.
For consumers with high credit card debt, a small monthly repayment might not even cover the interest that’s tacked onto the figure, which means you are making no progress in paying off your card and a negative cycle of debt continues.
It’s important to note that this monthly repayment fee is separate from any additional fees and charges that may be linked to the card.
If you don’t pay repay the minimum
Late fees are a cash cow for banks and fee gouging has long been a cause of contention between banks and their customers.
Avoid late fees by paying your minimum monthly amount by the due date. If you fail to pay it on time you’ll be charged a fee and risk having your card suspended so, at the very least, you should make sure you have enough funds to cover the minimum payment on the statement.
Set a reminder in your phone to settle it a day or two before the due date or, better still, organise a recurring autopay. Just make sure the account the payment will be debited from has enough funds, otherwise you could be hit with two sets of charges, a late fee and an overdraft fee. Missed payments also damage your credit score and can affect your ability to secure loans in the future.
If you only pay the minimum
Paying the minimum amount due on your statement may be helpful if you’re short on cash one month or have other pressing financial priorities, but it’s harmful in the long-term.
Higher interest & fees
The longer you have outstanding credit card debt, the more you’ll pay in interest and account fees. The MoneySmart credit card calculator lays out two situations with a $5,000 debt. In the first example, if you pay $246 per month (2.5 times the minimum due), you’ll pay off the debt within two years and pay only $902 in interest, meaning your total repayment amount is only $5,902.
However, if you only pay the minimum due (starting at $102), that debt will turn into $17,181 and take 33 years to settle. In other words, by making 2.5 times the suggested payment, you can save $11,279 in interest.
Be in debt for longer
As the above example demonstrates, by only paying the minimum due, your debt can last for decades rather than years. Aim to funnel every extra dollar you have into repaying your credit card and make compound interest work for you, not against you.
Impacts on your credit score
Your creditworthiness is affected by any loans you have – mortgages, car loans and credit cards. While a credit card can be useful in proving that you’re capable of managing debt, you need to be careful how you use it.
Maintain healthy repayment behaviours and, at the very least, pay your minimum bill every month. Failing to do so will reflect negatively on your credit score so you should definitely pay more than the minimum wherever possible.
If you can’t afford the minimum repayment
Life sometimes throws off your plans. You could have an emergency, a large and unexpected expense or find yourself in-between jobs, all of which could make even the minimum repayment on your card a stretch.
If you find yourself in this position, contact your bank immediately.
Speak to them before your monthly payment is due so they can waive any fees. In most instances they should be happy to do this and help their customers who are in a bind. If it happens frequently, talk with them about your options and enquire if there could be another product that better suits your needs.
The worst thing you can do is suffer in silence. Every day, banks speak to customers who are going through all sorts of challenges. Communicate with them, know your options and set a realistic repayment plan. Even if it takes months or even years to pay your card off, you’ll be grateful that you took steps now to fix your situation.