Making minimum repayments on your credit card: what you need to know

Minimum repayments are the minimum amount you are required to pay off your credit card balance - typically a percentage of the total balance outstanding on your credit card (2-3%) or $20. 

The trouble is that depending on your balance, if you were to pay only the minimum amount it could take you years to pay off the debt. Making a minimum payment may allow you to avoid late fees and give you more time to repay your debt - but that is about all. 

It’s not enough to avoid interest charges or to get your balance down to zero anytime soon. In fact, continuously making minimal repayments could lead you into a debt trap, as it may become challenging to fully clear the debt due to increasing interest charges.

RateCity has crunched the numbers on the money and time it would cost you to repay a $10,000 credit card debt with a 15% interest rate with minimum repayments versus larger, ongoing repayments

Credit card repayment comparison

Source: ASIC Credit Card Repayment Calculator. Note: Hypothetical example for demonstrative purposes of $10,000 credit card debt with 15% interest rate where customer makes minimum repayments versus higher ongoing monthly repayments. 

As you can see, while making minimum repayments on your credit card debt may seem more convenient, you’re actually adding decades and thousands of dollars in interest to your original debt. Making only the minimum repayments on a credit card can hurt you in the long run in terms of ongoing interest charges. 

In some instances, you could end up paying off a credit card as long as it could take to pay off a mortgage.

The advantages of making minimum repayments on a credit card is that it may help you avoid getting reported for a late payment and maintain your credit score. 

However, outside of the already mentioned time and money issues that occur when you delay paying off your credit card balance, you may also be limited in the future financial products you could be approved for. 

When you apply for other financial products, like a home loan or a car loan, your credit card debt is factored into your application. The debt may limit your borrowing power, or even result in the lender rejecting your application.

To minimise the cost of your debt, it is generally advisable to pay more than the minimum amount due whenever possible. This could help you reduce the outstanding balance faster as well as the interest charged on it. Additionally, if you find it challenging to repay your credit card debt, you may want to explore the option of transferring your debt to a card with a lower interest rate.

Balance transfer credit cards allow you to transfer your existing credit card debts onto a new card offering a low or zero interest rate for a specified period. This could give you some additional time to repay your debt without incurring additional interest charges.

Just keep in mind that transferring your credit card balance alone will not improve your financial situation if you continue to make only the minimum payments. You must budget ahead of time to ensure you can pay off your balance in the interest-free period, or you will start accruing interest again on that balance. 

If you’re experiencing financial hardship and struggling to repay your debts, speaking to a financial counsellor at the National Debt Helpline could be helpful in managing your situation effectively.