How credit card minimum repayments work

The idea of paying just the minimum payment on your credit card might appear attractive. After all, you can buy stuff with your credit card and just pay a fraction of the total credit card balance monthly. But this is far from a good idea.

Scroll down to learn more about how credit card minimum repayments work, their dangers, and what you can do about it.

What are credit card minimum repayments?

Credit cards have a repayment date — the date by which payment for the balance outstanding is due.

However, unless you have a charge card, you don’t have to repay the entire balance. It is possible to repay a small amount of the full balance due. Any remaining balance gets carried over to the next month and incurs interest.

That small amount the card company requires you to pay is the credit card minimum repayment.

How much is the typical minimum repayment?

The typical minimum repayment on most credit cards amount to about 2 to 3 percent of your full outstanding balance.

By letting you pay the minimum repayment, they can then charge you interest on the balance outstanding. And the next month, if you again make the minimum repayment, you get interest added on the total balance, including the interest from previous periods. This is a very lucrative source of income which is earned merely by letting you pay just the minimum repayment.

The problem with only making minimum payments

The main danger of just making the minimum repayment every month is the gradual build-up of debt, which may eventually become insurmountable.

• It costs a lot more. When you only repay the minimum required amount, you’ll be charged interest on whatever remains. The longer you make minimum repayments, the more interest you are charged for the privilege.
• You will be in debt for longer. So long as you keep making the minimum repayment and the balance is carried over, you’ll stay in debt.
• You can use all your available credit. When this happens, you are unable to use the card, which can further compound problems.
• It can damage your credit rating. If you miss a payment, it can damage your credit since the issuer will report it to credit bureaus.

This example scenario demonstrates the problem with only paying the minimum each month.

Example scenario

• Credit limit: $6,000
• Balance owed: $5,000
• Purchase interest rate: 20% p.a.
• Minimum repayment amount: 2% of balance

Note: All amounts have been rounded up to the nearest dollar.

No new purchases and minimum payment only

• After making the minimum payment owed on the $5,000 balance, $4,900 is carried over to the next statement period.
• You are charged 1.67% interest for the month (20% divided by 12), which comes to $82.
• Your new credit card balance will be $4,982 ($4,900 plus $82 of interest on that balance).
• You make no new purchases in the following statement period.
• The bank calculates your next minimum repayment as being $100 (that is $4,982 x 2%).
• You make that payment. The bank carries forward a balance of $4,882 into the next statement period.
• The bank calculates interest on that, which comes to $82. That gets added to your balance due, making it $4,964.

After two statements, you've only repaid $36 of the balance owed.

Minimum repayment vs full repayment

Making only the credit card minimum payment may seem like an attractive option if your finances are tight, since doing so keeps the account in good standing. However, it takes much longer to pay off the debt by making only the minimum payment, costs significantly more in interest charges, means you don't get interest-free days, and may negatively affect your credit score because of higher credit utilisation.

Repaying in full means debt does not accumulate, you save money on interest, you get the benefit of the interest-free days available, plus your credit score may benefit since your credit utilisation ratio is low.

Ways to reduce the repayment amount

• Use a balance transfer. If you've been grappling with credit card debt and getting nowhere, consider an interest-free credit card balance transfer. You'll still need to make the same minimum repayment, but the amount of interest will be less. This frees up cash to pay down the principal faster, and therefore reduce the minimum repayment amount.
• Plan ahead for big purchases. If you know that you have an upcoming large purchase like a holiday, you could use a credit card with 0% on purchases to spread the cost without accruing interest.
• Opt for lower ongoing interest. If you find yourself unable to clear the balance in full from time to time, consider a card with a low ongoing interest rate. Some cards have ongoing rates on purchases that are half the average.

FAQs

Do you have to make minimum repayments on a balance transfer?

Yes, you have to make the minimum repayments when you do a credit card balance transfer. Even if the balance transferred is interest-free and you do not make any new purchases with the card, you will still be required to make the minimum repayment every month.

Use the balance transfer period — which is typically interest-free — to increase your monthly repayments and pay down the debt.

Can minimum repayments be avoided?

There are two ways to avoid the minimum repayment on your credit card.

1. Pay off the balance in full on or before the due date.
2. Move debt to an instalment plan, if available.

Otherwise, you will be required to make the minimum repayments at the very least.

What happens if you fail to make the minimum repayment on time?

There are several ramifications for failing to make the minimum repayment.

1. You’ll be charged a late payment fee. If you forget to send the payment or the direct debit fails, and your payment is received after the due date, you will be charged the late payment fee. Some cards have no late payment fee.
2. It may affect your credit score. If your payment is late by more than 30 days, it becomes a missed payment. Missed payments are typically reported to the credit bureaus and may hurt your credit score. Read more about credit card late payment fees.