Don’t be lulled into a sense of complacency by the minimum payment specified on your credit card statement. Pay that tiny percentage – usually 2 to 3 per cent of the balance – and you could be in credit card limbo for a very long time.
In fact, credit card providers are now legally obliged to tell you precisely how long it will take to clear your card debt if that’s all you pay.
Look on the front page of your statement for the official “minimum repayment warning”, which tells you how long it would take to clear the card if you made no further purchases and paid only the minimum – and how much you’d pay in interest over that time.
You may need to sit down.
Let’s say you have a balance of $5000 on a card with an interest rate of 20.5 per cent. If you repay this at the minimum rate, starting at about $100 a month, it would take more than 50 years to clear the debt and you’d pay more than $27,000 in interest in the process.
However, if you paid $250 a month instead (and stop shopping) you’ll clear it 48 years earlier, paying about $6000 in interest.
Of course, you could clear your card every month, paying no interest at all. That’s what we’d advise.
But even if you can’t wipe the slate clean each month, it’s obvious that paying even a little bit more can have huge benefits.
A useful tool is the calculator at MoneySmart, which is provided by the Australian Securities and Investments Commission Moneysmart team.
The figures it generates aren’t precise because the actual amount will depend on the percentage your card provider uses to calculate minimum repayments and what fees you’re also paying, but it will give you a good idea of where you sit and what the surprisingly pleasant impact of making a higher payment could be.
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