Never be happy to just make the minimum repayments.
Minimum monthly repayments are generally set at 2% of the outstanding balance (with a minimum dollar amount around $20-$25).
2% 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.
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 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 date’ period) only operates when you pay off the full balance by the due date.
So if you only make minimum repayments you’ll never get any interest free period at all.
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 you’re thoughts are.