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Credit card minimum payments explained
Making minimum payments versus paying off your full credit card bill — which to choose?
If you can’t pay off your credit card balance in one go, you have the option of choosing minimum payments instead. In New Zealand, minimum credit card payments amount to 2-5% of your total bill.
While making credit card minimum payments helps you spread out your expenses, it can be an expensive affair. The balance you owe is charged an interest that could add up over time. This guide will help you navigate minimum versus full credit card payments, as well as compare the minimum payment terms of providers in New Zealand.
Comparing credit card repayment options
Your credit card bill displays the total balance due, alongside the “minimum payment” due. You can generally choose between three options for repayment — pay the entire balance in full, pay the minimum as stated on your statement, or make a payment for another amount.
Let’s consider each option:
- Pay the amount in full. Paying the total amount owed can help you avoid interest charges on your credit card.
- Pay the minimum amount. The minimum repayment amount listed on your credit card statement is the smallest amount you can pay while keeping your account in good standing – usually, around 2-5% of the total owed. However, your remaining balance owed is subject to an interest of approximately 20% per annum, which makes repayments expensive in the long-term and could put more debt on your plate.
- Pay another amount of your choosing. Similar to credit card minimum payments, this option allows you to pay less in the short-term in exchange for higher long-term repayment interest rates.
Some credit cards also give you a fourth, more structured option for repayments:
- Instalment plans. If your credit card offers instalment repayments, you could pay off your balance in fixed monthly amounts, over a set period. For example, if you owe $2,000 on your card, you might set up an instalment plan and pay $200 per month for 10 months. Sometimes you can also get a reduced interest rate on the balance.
How do credit card minimum payments work?
To make a minimum payment on your account, identify the “minimum payment due”, then use one of the repayment methods listed on your credit card statement. For example, direct transfer.
You can pay the minimum amount once before the due date listed on your statement, or make several payments throughout the month. As credit card interest is charged daily, making more frequent payments helps reduce your balance and interest charges for the next billing period. It also means you can plan repayments around your payday – whether it is weekly, fortnightly, or monthly.
However, making minimum payments doesn’t stop you from accruing interest on the remainder of your balance. So, if you continue using your credit card for purchases, your next statement will have a higher balance, higher minimum payment amount and more accrued interest.
Are credit card minimum payments a good idea?
While credit card minimum payments help you stay in good standing with the bank when you cannot pay off your full bill, this choice does come with its risks. In general, the smaller the minimum payment amount, the more you end up paying in the long-term. In some cases, this accruing debt could lead to a vicious cycle of continuous payments.
Let’s take a look at an example:
- Consider that you have a $1,000 credit card bill, with a minimum payment of 2%, which means you pay $20 on the due date.
- Assuming a credit card interest rate of 20%, your additional interest charge is 20% of ($1000 – $20)/12 which is approximately $16. That means that instead of paying the remaining $980 you owe, your next payment will be $996.
- If you had, instead, paid off a minimum amount of 5%, your additional monthly charges would have been lower. In the long-term, your total amount paid would also have been significantly lower, regardless of how long the interest repayments took.
As such, while credit card minimum payments help you pay the bare minimum each month, they could cost you in the long-term. You should opt for a payment amount that both meets your financial needs and reduces your long-term debt.
How can I save on interest charges while making minimum payments?
There are a few tips you can use to keep credit card interest to a minimum while you pay off your balance. These include:
- Paying as much as you can off the balance. Even if you can’t pay the full balance on your credit card, paying the highest amount affordable to you helps you save on interest. You can use a credit card repayment calculator to see how much different payment amounts could help you save.
- Consolidating your accounts. If you have more than one credit card, consolidating them into one account could help you save on both fees and interest charges.
- Setting up an instalment plan. Some credit cards may offer a reduced or promotional interest rate if you set up an instalment plan for your balance. You can see if this option is available by logging in to your credit card account or by contacting your bank.
- Getting a balance transfer card. These credit cards offer a low-interest rate on the debt that you transfer to the new account. This gives you a window of time when you can make payments towards your balance.
Frequently asked questions
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