Credit card payment allocation in Australia
Find out how credit card repayments work in Australia – and how they can help you save on interest charges.
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Not all transactions on your credit card are treated the same way. You can have separate balances for different types of transactions – such as purchases or cash advances – as well as different interest rates.
To help you manage these balances and potential interest charges, credit law in Australia is set up so that repayments for your credit card go towards paying off the balance with the highest interest rate first. This is called a payment hierarchy, and it's something you probably won't notice with regular card use.
In this article, we break down how this works in practice with your repayments, and how it can make a difference to your account.
What types of transactions make up a credit card balance?
Usually, credit card transactions fall into one of four main categories:
- Purchase balance. When you buy something on your credit card, it's added to your purchase balance. The interest rate on this balance is the main interest rate shown for your credit card and is usually between 8.99%-21.99% in Australia.
- Cash advance balance. A cash advance is when you withdraw money from your credit card account in the form of cash or when you make a "cash equivalent" transaction (such as buying a gift card). Cash advance transactions usually have much higher interest rates than purchases, which is why they're suggested for emergencies only.
- Balance transfer. When you move existing debt from one credit card to a new one, it's known as a balance transfer. Generally, your balance transfer will be subject to a 0% promotional rate for a certain time period. After that, it will revert to interest closer to the purchase or cash advance rate if you're still paying off the debt.
- Other promotional balances. These include instalment plan balances and purchase balances with low introductory rates.
How are payments allocated on credit cards?
The simple answer is that your repayments will go towards the balance attracting the highest interest first. Anything remaining will go towards the next highest interest balance, and so on down the list.
If you only have one interest rate for your entire balance (say, if you've only used it for purchases), you can use our calculator to figure out how long it would take you to pay off your credit card debt for a given monthly repayment.
Example: Payment allocation with a balance transfer
|Balance type||Initial debt||After first $500 payment||After second $500 payment||After third $500 payment|
|Cash advance (21.99% p.a.)|
|Coffee machine purchase (17.99% p.a.)|
|Balance transfer (promotional 0% p.a.)|
As you can see, the repayments have gone to the highest interest parts of the debt first. This leaves you with $500 owing after three repayments.
In this example, we've assumed your introductory balance transfer rate applies for the entire time. But if the 0% balance transfer rate ended after the first repayment and went to, say, 21.99% p.a., it would be paid off before the coffee machine purchase.
The payment hierarchy almost always means you'll owe less money in the long run. The main exception is when it comes to introductory rates on balance transfers.Your introductory 0% interest rate means repayments will always go towards purchases first since they will be charged interest. But once the introductory period ends, you could be left with a large balance that attracts higher interest than any purchases.This means it is important to avoid purchases until you've paid off your balance transfer if possible. Otherwise, see our guide for tips on managing purchases on balance transfer cards.
A brief background on credit card payment allocation
The current payment hierarchy system has been in place since 1 July 2012, following credit card reforms. Previously, repayments would go towards the most recent transaction instead of the highest interest balance.
Two other important reforms were introduced at the same time:
- A ban on over-limit fees, unless you agree to them
- A notification when you go over your credit limit
For more info on credit card reforms, see this page. If you want to learn more about making repayments, this guide takes you through the process. You can also use the repayment calculator to work out a payment plan or look at cards that offer instalment plans with fixed repayment options.Back to top
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