Making a part payment is one way you can reduce your credit card balance more effectively than paying the minimum repayment.
When you're presented with your credit card bill you have three choices: pay the minimum repayment amount, pay the full amount or pay an amount somewhere in between. There is technically a fourth choice of not paying it and incurring a late fee, but we don't recommend it.
The third choice is a part payment, and simply refers to you making a more substantial payment than the minimum repayment. A part payment will reduce what you owe, but won’t clear your debt completely.
Some people are under the impression that making part payments stops you being charged interest. Unfortunately that’s not the case. Let’s have a look at how part payments actually work.
How do part payments work?
When you make a part payment you reduce the total amount you owe your card provider. This allows you to keep using your card, and stops you running into any late fees. Because interest is charged on your outstanding balance, by reducing your balance you’ll reduce the amount of interest you’re charged.
Part payments don’t stop you accruing interest. The only way to completely avoid interest is to repay your entire balance every month. Anything left unpaid will be charged interest. You’ll also lose the benefit of your interest free days for the next billing period.
While part payments won’t help you during this billing period, they will help you during the next. This is because interest is charged daily, so by making part payments throughout the month you’ll reduce your balance and interest charges for the next billing period.
Let's look at an example.
Rob has a balance of $10,000, with a credit card that charges a rate of 19% p.a. If he paid the minimum repayment of 2% he'd make payments of roughly $200 each month and pay off approximately $500 off his balance in addition to $1,800 worth of interest over one year. If Rob kept this up it would take him longer than 25 years and more than $27,000 in interest.
If he instead made a part payment of $600 a month, he'd pay total interest of $1,803 over the 1 year and 8 months it would now take him to pay off his balance.
As you can see making a part payment can be a great solution to large credit card debt.
How can you use part payments on multiple credit card debts?
Having multiple credit card debts can make it difficult to pay your whole balance off. Here are some strategies which use part payments to reduce multiple credit card debts.
- Pay the highest interest rate balance first. This strategy sees you order your debts from lowest interest rate to highest interest rate and pay the minimum repayment on all of them except for the highest interest rate debt. Make part payments on this debt and reduce it and then work your way down the list.
- Pay the lowest interest rate balance. Another strategy concerning part payments is the snowball method. This sees you order your debts from smallest to largest. You pay the minimum repayment on all debts except for the smallest, which you make part payments on. Once this debt is paid off you move to the next debt, and pay the amount you were paying on your first debt in addition to the minimum repayment. This sees you gradually build up your part payments to bigger the debt is.
- Pay highest balance first. You could employ a strategy similar to the snowball method except with the highest balance first.
Balance transfer offers
If you're in debt, one way to use part payments to their full effect is to take advantage of a balance transfer offer.
These allow you to transfer your debt to a new credit card and get a lower interest rate—sometimes even 0% for a number of months. This means your payments will go towards the principal debt rather than interest charges, and can give you a headstart.
Comparison of balance transfer credit cards
Credits don’t equal payments
If you buy something from a store and subsequently get a refund it won’t be counted as a payment. On your credit card statement you have a section where payments are listed. A credit won’t show up here, but will instead be in the section below where "Other credits or payments" are listed.
Repay your balance in full
As always, our advice is to repay your outstanding credit card balance in full each and every month whenever possible. It’s the only way to avoid interest and get the maximum benefit from your credit card's interest free days.
Part payments throughout the month are useful because they help minimise the interest you’re charged. If you’re not sure you’ll be able to clear your balance one month, making part payments is a good idea, or as mentioned above, if you’re already in debt they can be a good way to bring your balance back down to $0.
If you’re finding it hard to fully repay your balance or you feel tempted to spend more than you can afford, speak to your bank's customer service team and get them to reduce your credit limit, or see what other options may be available to you.