calculating-monthly-repayments

How to calculate your credit card monthly repayment

Calculate your minimum monthly payment and work out how much you should be paying to take control of your debt.

When you look over your credit card statement each month, the closing balance on your card should be the first thing you notice. However, if you take a closer look at all the information contained in your statement, you will also see the words “Minimum monthly payment” followed by an amount.

This number is the minimum payment you are required to make towards your credit card debt for that particular month in order to meet your obligations under the credit card contract. But how is this amount calculated and what are the financial implications of only making minimum monthly repayments? Read on to find out.

What is the minimum I need to pay on my credit card?

Your card issuer sets the minimum monthly repayment on your credit card. This amount varies between providers and is calculated either as a percentage of your closing balance, usually from 2-3%, or charged at a set amount of between $20 to $30. As an example, let’s look at the minimum monthly payment requirements of some popular credit card issuers:

  • American Express credit cards: The higher of $30 or 2.5% of your closing balance
  • Westpac credit cards: The higher of $10 or 2% of the closing balance
  • CommBank credit cards: The higher of $25 or 2% of the closing balance
  • NAB credit cards: The higher of $25 or 2% of the closing balance
  • ANZ credit cards: The higher of $25 or 2% of the closing balance

The minimum allowable repayment amount will be shown on your monthly credit card statement, or you can find the minimum payment limits in your credit card contract.

Will I be repaying my debt if I just pay the minimum?

Ideally, you’ll be able to pay your credit card balance off in full each month. This will ensure that you won’t have any further interest charged on the amount you owe and help you prevent your debt spiralling out of control.

If you only make the minimum monthly payment, you will still be paying off the money you owe, but you’ll be doing so at the slowest rate possible. In fact, rather than paying off the initial credit you borrowed, a large portion of your repayments will go towards paying off interest charges.

There are two factors that make up your minimum monthly repayment amount: the balance portion and the interest portion.

  • On a $5,000 card balance with a minimum repayment of 3% for example, you’d need to pay at least $150 each month.
  • You can calculate how much 3% of your balance is with the following formula: (3/100) x (your balance) = (your balance repayment amount).

Unless your card has an offer of 0% for balance transfers or purchases, interest is also added on top of the amount you charge to your card each month. Find out how you can estimate the amount of interest you’ll accrue below:

  • To estimate the amount of interest included in your monthly repayment, use this calculation: (interest rate, eg, 15% /100) x (your balance, eg, $5,000) ÷ (months, eg, 12) = (your initial interest repayment amount). Using this calculation, you can see that your interest payment will be $62.50.
  • In this case, the interest portion of your repayment will be around 41.6% of a minimum payment of $150.

As you continue to pay down your debt, your interest charges will also reduce each month as your balance decreases. Similarly, if you only pay the minimum repayment and your debt continues to grow with interest, your interest payments could increase with time.

What will happen if I just make the minimum credit card repayment?

While it may sometimes be tempting to only make the minimum monthly repayment on your credit card, you should avoid doing this whenever possible for a few reasons:

  • Repayment takes longer. It will take you a much longer time to repay the money you owe. Depending on your balance and the card’s interest rate, this could add several years to your repayment period.
  • It costs more. The longer you carry a debt on your credit card, the more interest will be charged to your account. This means your credit card debt could end up costing you thousands of dollars more and will take much longer to pay back.
  • It will affect your credit score. If you continually carry a balance on your credit card that takes up a large portion of your overall card limit, this can impact on your credit score.

If you want a better idea of just how much only making the minimum credit card repayment will affect your finances, check your credit card statement. This shows how long it will take you to repay your debt if you only repay the minimum as well as the total interest you will have to pay.

Matt’s minimum repayments

Meet Matt, a 30-year-old teacher from Brisbane. Matt has a $5,000 debt on a credit card with an interest rate of 15% p.a., but he’s unsure about the most efficient way to pay down his debt. The minimum monthly payment on his latest credit card statement is $102 (2% of his closing balance), but Matt decides to calculate how much he can save if he starts putting money aside and paying $250 off his card each month.

As you can see in the table below, Matt can save a massive $6,323 by making higher repayments and paying his debt off in less than two years. However, if he were to continue to only make the minimum required payment, it would take Matt almost 24 years to get out of debt. This clearly demonstrates why you should always try to pay more than the minimum monthly payment if possible.

If making minimum monthly repaymentsIf making higher monthly repayments
Credit card debt$5,000$5,000
Interest rate15% p.a.15% p.a.
Monthly repayment amount$102 (initially - amount decreases each month as closing balance also drops)$250
Total time to pay off debt23 years 10 months1 year 11 months
Total amount paid$12,030$5,707
Total amount saved-$6,323

Paying down a credit card debt with a promotional interest rate

If you sign up for a credit card with a special promotional interest rate on purchases or balance transfers for an introductory period, you’ll need to consider a few additional factors when calculating your repayment requirements:

  • Revert rate. While 0% p.a. interest may apply to your balance transfer or purchases now, you need to be aware of what interest rate the card will revert to once the promotional period ends.
  • Length of promotional period. How long does the low or zero interest period last? Depending on the credit card you select, these introductory promos last for anywhere between 3 and 24 months. The revert rate will apply to your balance as soon as the promotional period ends, so you will want to pay off your debt before that occurs.
  • Additional purchases. If you make more purchases on your credit card, your total balance and minimum monthly payment will both increase. You will need to be aware whether your minimum monthly payments will then go towards paying off your initial balance or towards repaying your new purchases.

Finally, it’s crucial to be aware that making only the minimum repayment each month will not result in the debt being paid down within the promotional period. This means you will need to contend with a much higher revert rate applying to your balance, which will increase the amount you need to repay and lead you deeper into debt.

Have more questions?

What happens if I fail to make even the minimum monthly payment before the due date?

Fees and charges for late payment may apply. This could lead you further into debt and also damage your credit score.

Where can I access a copy of my credit card contract?

This will be available from your card issuer.

Will I still be charged interest if I make the minimum repayment?

Yes, interest charges will still apply.

Is there anything I can do to reduce the interest charged on my debt?

Yes, you may wish to move your debt over to a new balance transfer credit card.

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2 Responses to How to calculate your credit card monthly repayment

  1. Default Gravatar
    | March 14, 2014

    Hi

    I want to work out how much monthly payment will come to for $6000 balance on a 0% balance transfer for 12 months ?

    Thanks

    • Staff
      Jacob | March 17, 2014

      Hi, Kumar.

      Thanks for your question.

      You will need to pay back at least the minimum monthly repayment each month. This is a percentage (usually 2 or 3 percent) of your total outstanding balance. This is the minimum you must pay each statement period, you’re free to pay as much over this as you would like, as often as you like.

      I hope this helps.

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