Never be happy to just make the minimum repayments. Minimum monthly repayments are generally set at 2% of the outstanding credit card balance (with a minimum dollar amount around $20-$25).
Two per cent per month equates to 24% per annum, which is enough to cover interest, but only very, very slowly whittle down the amount outstanding.
With a credit card interest rate of 18% and $5,000 outstanding, for example, it would take over 29 years and cost more than $16,000 to repay using minimum payments, more than three times what you paid for your goods.
So, you should avoid paying only the minimum repayments.
To see the impact of paying off your card faster than the minimum, spend a minute or two using ASIC’s Moneysmart Credit Card Calculator.
Tips for erasing that credit card debt.
- Unless you have other debt at a higher interest rate, make paying off your credit card a priority.
- Use any savings you have – they are only earning a fraction of the interest you are paying.
- Use internet banking to set up a fixed recurring payment to your credit card. Time it for just after payday.
- See if you can switch the balance to a new card offering zero interest for closing balance transfers – then cancel the old card so you’re not tempted to run up extra debt.
- If you have debt on more than one credit card, focus on paying down the highest rate card first (and just the minimum on the other) to maximize debt reduction bang for your buck.
- If the interest rates are the same, focus on the smallest debt first to get it out of the way.
- Cancel unnecessary cards as you pay them off, so you don’t run up more debt.
Kiss your interest free purchase period goodbye
Your ‘up to 55 day interest free’ period (which is really a ’25 days from the statement period) only operates when you pay off the balance in full by the due date.
So if you only make minimum repayments you’ll never get any interest free period at all.
Three Things You Should Not Buy Using a Credit Card
With a credit card, you have the power to pay for anything that is within your credit limit.
But if you want to avoid spiraling debt, you should avoid using your card to purchase the following:
Rent / Mortgage
Avoid using your credit card to pay your rent or mortgage unless you have a solid plan that involves repayment each month to gain perks or rewards.
Mortgage repayments are regular, and the total bill could quickly build up if you only pay the minimum payments.
Even if you plan to pay the total every month, you still need to be sure that the fees and added amount of interest incurred will not outweigh any benefits that you get through reward points.
A New Car
A brand new car is such a high value item that you should not put it in your card.
First, the interest charges will be very high, especially if you are planning to pay the minimum bill.
Unless your limit runs in millions, you are likely to use a huge portion of your limit, which will result in maxing out your limits.
You don’t want to do this if you are trying to build your credit score.
Instead of using your credit card, apply for bank financing. The interest will be significantly lower, and you can save more money on fees and charges.
Watch out if you have a strong passion towards a business idea.
You may match it up with patience, finance strategy, and a solid business plan.
Because you want to get the ball rolling, you might be tempted to use your credit card in paying for initial inventory, leasing a space, paying for a website, and other startup expenses.
You promise yourself to pay the total amount once the money begins pouring.
What will you do if the business fails? Aside from your debt, you now have to pay interest plus charges.
Instead of maxing out your credit card, apply for business loan from your local bank.
What are your thoughts?
Are you stuck in the minimum repayment rut? Are your credit cards in control? Is there anything else you’d like to know about managing credit card debt?
Join the conversation — leave a comment below and let us know what your thoughts are.