Caucasian couple discussing over a credit card balance

What happens when you carry a credit card balance?

Information verified correct on December 3rd, 2016

A lot can change if you don’t pay off your credit card balance in full each month, including interest charges and limited features. Here’s what you need to know.

Almost one in four (23%) Australians can’t pay off their balance every month, according to a survey conducted by creditcardfinder.com.au in May 2016. As a result, it’s no surprise that Australians collectively owe billions of dollars in credit card debt, with many struggling to repay their balance.

Meanwhile, the Australian Securities & Investments Commission’s (ASIC) Credit Card Debt Clock shows an average balance of $4,350 per credit card customer in June 2016. This data suggests that even the 77% of people who can afford to pay off their cards each month still carry a balance from time to time.

Regardless of the reasons you have for carrying a balance, it has a significant impact on your finances. Here, we take a look at the key things you need to know when you pay less than the full amount off your card every month.

What are the consequences of carrying a balance?

You’ll start accruing interest

Interest is charged for any balance owing on a credit card at the end of the statement period. The rate of interest you pay depends on the type of balance, with three main categories:

  • Purchases. Most new transactions made on your credit card are defined as “purchases” and are subject to the purchase interest rate. Depending on your card, this rate could be as low as 9% p.a. or as high as 22% p.a. (variable).
  • Balance transfers. Moving a debt from an existing account to a new credit card is known as a “balance transfer”. When this balance is added to your account, interest applies at the balance transfer rate. Usually you can get a low introductory interest rate – or even 0% interest during the honeymoon period. But the standard balance transfer rates that apply after this intro period can be as high as 22% p.a. (variable).
  • Cash advances. Cash advance transactions, such as ATM withdrawals or gambling purchases, usually have a higher interest rate than purchases. This rate is always applied from the day the cash advance is made, and will be charged until the whole balance of that transaction is paid in full.

Depending on the balance on your card, one or more of these rates could apply if you don’t pay it off in full each month.

You won’t get any interest-free days

Interest-free days are designed to give credit card customers a period of time when they can make purchases without being charged interest. For example, you could be offered “up to 55 days interest-free”, which would begin at the start of a statement period.

A key requirement for interest-free days is that you pay your balance in full by the statement due date. Otherwise, interest is charged from the day a purchase is made.

Most credit card companies also specify that you must pay your balance for at least two consecutive statement periods before interest-free days are available. This means if you carry a balance for one month, but then pay it off in full the next month, you probably won’t be able to take advantage of this feature straight away. Check with your credit card provider to find out the specific terms and conditions surrounding your interest-free period so that you can get the most out of it when you don’t carry a balance.

It could affect other credit card or loan applications

If you want to apply for another credit card or a loan, your existing card debt could work against you. Lenders assess applications for new credit based on factors including your income, current debt levels and credit history. This means that when you apply for any new form of credit, you’ll need to include details of your debt, which could influence the lender’s final decision.

Another factor to consider is how carrying a credit card balance could affect your credit history. While the size of the credit card balance you carry won’t be listed on your file, account payment details are included. So if you don’t make the minimum payment, miss the due date or default on your account, it will affect your credit history and any new applications that you make.

Credit card statements with credit cards, pen, calculator and coffee on a wooden table

What should I do if can’t make a payment on my card?

If you find that you’re struggling to make your credit card payment by the due date, stay calm. These steps will help you deal with it.

  1. Contact your credit card company. Call your credit card company and explain your situation as soon as possible. This can reduce the stress and also help you find a reasonable solution based on your circumstances.
  2. Discuss a payment plan. Credit card companies are experienced with these scenarios and will be able to advise you on your payment options. Usually this will involve a payment plan that suits your current financial and personal circumstances. In some cases, they may also freeze your account until your circumstances improve.
  3. Develop a budget. Once you have made your credit card issuer aware of your circumstances, plan a budget for repaying this debt. Consider using any available assets to pay down the card, including savings.

Another important thing to remember is to regularly check your credit card statements so that you know how much you owe. The sooner you can deal with this debt, the less negative impact it will have on your finances.

How can I manage my credit card balance?

  • Balance transfer cards. Moving your credit card debt to a new card with a low introductory interest rate can help you save money on interest charges and pay off the balance faster. Just make sure you check the length of the intro period and the standard rate that applies after that time.
  • Set up automatic payments. Most credit cards let you set up automatic payments from a transaction account. This will ensure you make payments by the due date on your statement. Usually you can also choose whether you pay just the minimum, or the full amount owing. Note that if you choose to only pay the minimum each month, you may still end up carrying a debt at the end of the statement period.
  • Only spend what you can afford. Aim to use your credit card for purchases you can afford to make based on your income. This way, you should be able to pay off the balance in full every month.
  • Get a card that works for you. If you know you regularly carry a balance, compare cards to find one that offers a low ongoing interest rate so that you can reduce the additional charges applied to your account.
  • Consider other payment options. Carrying a balance on your credit card costs money. If you can find another way to make payments, such as by saving up for planned purchases or setting money aside for emergencies, it will help reduce the overall cost of your spending.

While it’s easy to carry a credit card balance, it will have a serious impact on your account. Being aware of these factors and the ongoing implications of credit card debt will help you make informed decisions about how you manage your balance so that your card works for you.

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Amy Bradney-George

Amy is a Senior Writer at finder.com.au with more than 10 years experience covering credit cards, personal finance and various lifestyle topics. When she’s not sharing her knowledge on money matters, Amy spends her time as an actress.

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