Your credit card’s minimum payment amount
We’ve updated this article because the minimum monthly repayment we calculate will change from 1 April 2014.
Don’t fall into the trap of thinking that your minimum credit card payment amount is enough to avoid interest charges. Or thinking you’ll get your balance down to zero quickly if you keep paying the minimum every month. While only making a minimum payment can give you the flexibility to make purchases and could be useful for a short period until you can pay off your card balance, it is only the bare minimum you have to pay to meet the obligations of your credit card’s contract.
What making your total minimum payment does
Making the total minimum payment each month means you avoid a late payment fee and ensures you can keep using your card. The terms of your contract require you to pay this minimum amount, otherwise we can put a block on your card to stop you from using it. If you’re struggling to make the minimum payment, talk to us as soon as possible to see how we can help you.
What making your total minimum payment doesn’t do
Paying the minimum amount doesn’t stop us from charging you interest. If you only pay this amount you’ll be charged a month’s worth of interest calculated on your balance each day for that statement period. You will also lose your interest-free days for the next statement period, meaning interest charges will keep adding up.
And if you didn’t pay your balance in full last month, you could now be paying interest on interest. This could happen if, say, you’re away on holiday and you forgot to pay it in full.
Making the minimum payment also doesn’t help you pay off your credit card quickly. In fact, only paying the minimum amount each month means it could take you a really long time to pay it off. Even if you’ve reached your credit limit and stop using it for purchases, the interest keeps building so a minimum payment only reduces your debt a little.
Let’s say you have a credit card debt of $1,000 at an annual interest rate of 18%. If the minimum payment is set at 2% of the card balance and that’s all you pay each month, it will take you just over five years to pay it off, at a total cost of around $539 in interest. And that’s only if you don’t make any new purchases or cash advances on the card. It doesn’t include the annual fee, either.
But if you committed yourself to paying $100 on your card each month, it could only cost you $74 in interest and you’d have paid it off in 11 months.
While only making minimum payments can be useful for short periods to give you some flexibility, as you can see it is important to have a plan to reduce your balance. You might work out a savings plan to reduce it over several months or maybe you know that you will have some extra money coming in to pay off your whole balance at once, like tax time or when you get your bonus each year.
How we work out your monthly payment
We work out your monthly payment by looking at your closing balance on your card this month:
|If your closing balance is…||Your monthly payment amount is…|
|More than $1,250||2% of the amount you spent|
|Less than $25||The whole amount of your balance|
Then we need to work out your total minimum payment.
Monthly payment and total minimum payment – they could be different
Sometimes your monthly payment and total minimum payment will be the same amount, but there could be times when it’s different.
How we work out your total minimum payment
Overdue amounts: Anything that you didn’t repay towards your total minimum payment last month is overdue, so we add it to your monthly payment and it becomes part of your total minimum payment this month.
Overlimit amounts: If your card was over your credit limit at the end of your last statement, we add this amount to your total minimum payment. If your credit limit is $1,000 but your balance is $1,050, that’s an overlimit amount of $50.
If you are both overdue on your last payment and you are over your credit limit, we take the greater of the two amounts and add it to your monthly payment.
Let’s say your total minimum payment was $50 last month, but you only paid $40. You still owe $10. We’ll add this to your next total minimum payment. You’ll see it on your statement listed as “Past due/Overlimit amount”. (There’s also a $5 late payment fee for not paying the total minimum payment by the due date last month, which will be added to your closing balance this month.)
But if you also bought a new pair of sunglasses that pushed you over your card limit by $60, this would be greater than the $10 you have overdue. In that case $60 will show as your “Past due/Overlimit amount”, and be added to your minimum payment, instead.
So the $60 shown in this example (in Past due/overlimit amount) is added to the $25 monthly payment to equal your payment – now $85.
Any overdue/overlimit amount is due immediately. You need to pay your total minimum payment amount by the due date to avoid paying a late fee.
Whenever you can, pay your balance in full
Take a look at your statement. As well as the total minimum payment amount, there’s a “closing balance” amount. The closing balance is the total amount you owe for that statement period – including your purchases and any interest charges.
If you pay your closing balance in full by the payment date, not only does it save you interest charges on the purchases you made that month, it gives you interest-free days for purchases you make in the next month.
Read about how your interest free days work to avoid paying purchase interest.
If paying your closing balance in full isn’t possible, read our next blog post about making part payments to your credit card.
Did you find this article helpful?
If there’s anything else you’d like to know, leave us a comment below and we’ll reply as soon as we can.
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