When is the right time to pay off your credit card?

When is the right time to pay off your credit card?

Gone are the days that flashing your plastic was a sign of wealth and status. Years of having debt hanging over the heads of millions of households has left many with a debt hangover.

So, it’s no surprise that more and more Aussies are working at paying down their debts or cutting up their cards for good.

The latest Reserve Bank of Australia data shows that Australians are becoming diligent about paying off their credit card debt. $1.64 billion has been wiped off of the total credit card debt accruing interest in May. Further, there are 1.22 million fewer credit card accounts year-on-year.

The popularity of buy-now-pay-later apps, such as Afterpay, may have also contributed to the shift. Younger generations may be choosing to avoid credit cards altogether in favour of convenient payment methods that don’t charge sky-high interest rates.

If you’ve been struggling financially and mentally with the pressures of credit card debt, you may feel the right time to pay it off was yesterday. But taking the steps today to pay down your debt is a better time than any to start.

When should you pay your credit card?

1. When your credit card bill is due

The best time to pay off your credit card is on time, every month, when you get your statement.

This isn’t just to give yourself a gold star for paying bills on time, but it’s also to help reduce the amount of interest that may be charged to your outstanding balance.

Every time you don’t pay your credit card balance in full each statement period, you accrue interest on said balance. This is one of the most common ways Aussies spiral into credit card debt.

If you’re the type of cardholder who always finds themselves paying interest on their card balance, you may want to consider switching to a lower rate option. This can help you to lower the rate you accrue debt while you work on paying off your credit card balance.

2. When you’re only making minimum repayments

Making only the minimum required payments on your credit card bill can feel like you’re ticking the right boxes, but in reality, you’re potentially delaying the time it takes to pay down your debt by years, even decades.

The minimum required repayment on a credit card is typically 2 per cent of the balance or $20, whichever is higher.

On a $10,000 credit card bill with an interest rate of 15 per cent, for example, it may take you 31 years and 3 months to pay off the balance. Your total credit card debt could also snowball into $25,095 due to interest.

That’s over an extra $15,000 you may wind up paying your card provider just for the convenience of making the minimum repayment amount.

3. When you get a windfall

Whether you’ve just gotten a large tax return, or won big at the pokies, if you’ve suddenly come into some money, you may be tempted to spend it on a holiday or home redecoration. However, if you wanted to be responsible, financial experts would recommend you put this money towards your debts.

If your credit card isn’t your only debt and you’re still paying off a personal loan, for example, the general rule of thumb is to pay off the debt with the highest interest rate first. This is also typically your credit card debt.

Credit card interest rates can climb as high as 24 per cent, not to mention the potentially high annual fees charged for perks like rewards programs and travel insurance. This is why if you suddenly come into some money, you may want to consider putting it on your credit card debt and cutting it down or clearing it once and for all.

4. When it starts hurting your credit score

If you’ve accrued credit card debt and are struggling to meet your repayments, this can potentially negatively impact your credit score.

Your credit score signifies your ‘trustworthiness’ as a borrower, as determined by your credit history. An excellent credit score means a potentially higher rate of approval for financial products and the opportunity to be offered better interest rates. A bad credit score may mean you’re locked out of being able to get financial products.

If you’re missing credit card repayments, you may be hurting your chance to get approved for loans or any other financial products from credit grantors. Further, you may receive a default listing on your credit report, start being chased by debt collectors and even face legal action for the outstanding payments.

5. When it impacts your mental health

One of the biggest signs that it’s time to get serious about paying off your credit card is when it begins to impact your mental health.

A study by Associate Professor Christopher Davis defines financial stress as the “subjective, unpleasant feeling that one is unable to meet financial demands, afford the necessities of life, and have sufficient funds to make ends meet”.

Further, according to Head to Health, signs that financial stress is affecting your mental wellbeing include:

  • Arguing with the people closest to you about money
  • Having trouble sleeping
  • Feeling angry or fearful
  • Mood swings
  • Tiredness
  • Loss of appetite
  • Withdrawing from others

Having a credit card debt looming over your head can seriously contribute to these feelings of stress, anxiety and depression. This is why it’s so crucial that you address, and try to get on top of, financial problems as early as possible.

What to do if you have outstanding credit card debt?

There are a few things you may want to consider when it comes to paying off your credit card:

  • Create a budget and stick to it. The best way to work off your credit card debt is to take a look at your budget, work out what you can cut down on and commit to putting a percentage of your income into your debt until it’s paid off.
  • Sell your belongings. Have you done a spring clean recently? Now is the perfect time to go through your house and look for any items you can part with on Facebook Marketplace or Gumtree and use this cash to chip away at your debt.
  • Balance transfer credit card. This involves you transferring your existing balance to a new card with a zero per cent interest-free period over a number of months. Balance transfer cards may offer some much-needed breathing room for you to pay off the outstanding balance. Just keep in mind that if you don’t pay off your balance by the time the interest-free period is up, you will begin to be charged interest on your balance.
  • Debt-consolidation loans. If you have multiple debts, a debt-consolidation loan may be a more convenient way of managing them and keeping interest down. Instead of juggling multiple repayments with multiple interest rates, you then make one monthly repayment with one interest rate.

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Learn more about credit cards

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

How to pay a credit card from another bank

Paying or transferring debt from one lender to the other is called a balance transfer. This involves transferring part or all of the debt from a credit card with one lender to a credit card with another. As part of the process, your new lender will pay out the old lender, so that you now owe the same amount of money but to a new institution.

Many credit card providers offer an interest-free period on balance transfers to help new applicants better handle their debt. During this period, cardholders are not required to pay interest on the debt they brought over from the other card. This can be a great opportunity for consumers to pay off credit card debt with no interest. There are often fees associated with balance transfers; normally, these are a percentage of the amount transferred.

So make sure you read the terms and conditions of the card before transferring any debt across.

How to get rid of credit card debt

  1. Calculate your debt. Credit card calculators make it easy to determine the repayments required to chip away at your debt in the shortest timeframe possible for your budget.
  2. Repayment plans. Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
  3. Talk to your credit provider. If you’re still struggling with your debt, give your credit provider a call. You may be able to come to a new arrangement.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

How to get a credit card for the first time

A credit card can be a useful financial tool, provided you understand the risks and can meet repayment obligations.

If you’re a credit card first-timer, review your options. Think about what kind of credit card would suit your lifestyle, and compare providers by fees, perks and repayments.

Once you’ve selected a card, it’s time to apply. Credit card applications can generally be completed in store, online or over the phone.

When you apply for a credit card for the first time, you must meet age, residency and income requirements. As proof, you must also provide documentation such as bank account statements.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

How to calculate credit card interest

Credit card interest can quickly turn a manageable balance into unmovable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.

The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.

This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.