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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.) | $300 | $0 | $0 | $0 |
| Coffee machine purchase (17.99% p.a.) | $500 | $300 | $0 | $0 |
| Balance transfer (promotional 0% p.a.) | $1,200 | $1,200 | $1,000 | $500 |
| Total debt | $2,000 | $1,500 | $1,000 | $500 |
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.
Watch out: Making purchases with an active balance transfer
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.
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.
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After advising ANZ of the 2012 changes to the way payments are credited to my account, with regards to highest interest first, they responded to me that they are able to apply the payments in the manner that suits them. So even after reducing my credit card debt by $7000 since February this year I find that my cash advance interest is still rising even though I stopped making transactions on it. How is this possible and are they providing me with the correct information?
Hi Bill,
Thank you for getting in touch with finder.
Although this 2012 credit card reform is paying off the debt that is collecting the highest interest i.e. cash advance, it’s also important to remember when you made the payment and when had your cash-like transactions.
I suggest that you have your detailed credit card statement with you when you speak to ANZ on the phone or in the nearest local branch to clarify how your cash advance interest accumulated when in fact you’ve made payments to lessen them.
As a friendly reminder, while we do not represent any company we feature on our pages, we can offer you general advice.
I hope this helps.
Please feel free to reach out to us if you have any other enquiries.
Thank you and have a wonderful day!
Cheers,
Jeni
So I have a credit card that I used for petrol etc and pay the statement off every month to avoid interest.
I was offered a balance transfer of 0% for 18months on the same credit card. I took this up and continued to use the card like I always have.
I made payments like I normally do and now this credit card statement I’ve been charged interest.
I thought all repayments were meant to go off the higher interest portion off the amount owing but the payments I was making went off the balance transfer amount instead plus the regular purchase transactions.
Is this meant to happen? Am I mixed up on all this? Lol
Can you please clarify?
Hi Sezza,
Thanks for reaching out.
Any new purchase you make on a balance transfer credit card will be charged interest at the purchase rate and not the promotional balance transfer rate.
Banks do repay the balance that’s accumulating the highest interest first, thus in most cases, your purchases that collect the standard interest rate will be paid off before your transferred balance.
Given the low or 0% balance transfer offer is only in place for a certain number of months, it’s important you pay off purchases so you can repay your balance before the offer ends.
You may need to reach out to your bank regarding this concern and review the fees, costs and terms and conditions of the offer to get better understanding of this matter.
Cheers,
Joanne
The Citibank website still seems to contradict the changes made last year. Is this correct?
Hi Frank.
Thanks for your question.
There is an exception when you have a revolving deferred interest promotion on your account. According to the Citibank website, ‘We are required to direct the amount of your payment in excess of your minimum amount due first to your next expiring deferred interest promotion, and then any remaining would be applied to your highest APR revolving balance.’ This may happen within a period of two to three months of when your low interest promotion expires.
After this, your repayments will be applied to the revolving balance with the highest APR.
I hope this helps.