Credit cards offer a convenient way to borrow large or small amounts of money whenever you need it, which can prove very useful in the right circumstances. But of course, any money you borrow will need to be paid back, with interest over time.
Unlike personal loans, credit cards don’t have set repayment plans, meaning you can enjoy the flexibility to pay back as much or as little of your debts as you prefer. While a certain level of credit card debt can help you manage your household finances and lifestyle expenses, it’s easy to end up with more credit card debt that you can easily afford to repay, if you’re not careful.
To get an idea of how much you should pay off your credit card each month to avoid paying too much interest or ending up in financial stress, read on:
Credit cards should ideally be paid off in full each month
In an ideal world, you should try to clear your credit card’s entire balance by its due date each month. This helps to keep your card’s debts from building up and your interest charges from spiralling out of control.
If repaying everything you spend on your credit card every 30 days sounds challenging, there’s usually a little bit of wiggle room available. Most credit cards offer a number of interest-free days (45 days and 55 days being common) on purchases each month – as long as your balance is cleared before the month’s interest-free period has expired, you can avoid interest charges on your credit card spending.
But if your credit card balance is not completely cleared by the end of your card’s interest free period, you’ll start being charged interest on what you owe. Until your credit card debt is cleared, you won’t be able to benefit from interest-free days, meaning you’ll be charged interest on any new purchases from the moment you make them, as well as the balance you already owe.
Pay more than the minimum if possible
If you already have a substantial credit card debt, and your household budget is tight, it’s tempting to just pay the absolute minimum required by your credit card provider to avoid being hit with late penalty fees and eventually default notices (which is a Very Bad Thing for your credit history!).
But while making a minimum payment is better than making no payment at all, making minimum repayments is rarely a practical long-term strategy for managing your credit card debt.
Because many credit card companies set very low minimum repayment requirements, often around 2% of the debt owing, it would take a very long time to clear a credit card debt by only making the minimum repayments. And when you take the interest you’ll be charged over this long length of time into account, these additional costs will likely far outweigh the value of any credit card purchases you’ve made.
Pay early, pay often, and avoid extra spending
If you want to pay more than the minimum on your credit card, but can’t afford to pay it all off in one go, the more you can pay off and the sooner you can pay it, the better.
Even though interest appears on your credit card bill each month, interest on what you owe is calculated daily, and the total cost is tallied up later. The sooner you can make a dent in the balance owing on your credit card, the less interest you can ultimately be charged, and your credit card can end up costing you less in total.
Also, if your goal is to clear a credit card’s debt and stop being charged interest, try to resist the temptation to make additional purchases using your credit card – this can undo your previous good work, and lead to paying additional interest on what you owe.
Get help if you need it
If you’re struggling to repay credit card debts, there are steps you can take to get your finances back under control. For example, some borrowers use debt consolidation loans to swap multiple credit card payments each month, each with individual interest charges, for just one loan repayment with one interest charge per month, which is much simpler to manage.
For advice that’s specific to your personal situation, contact a licensed accountant or qualified financial adviser. If you’re struggling with financial hardship, contact the Australian government’s National Debt Hotline on 1800 007 007.