Creditcards can be convenient when balances are repaid in full, but carrying abalance can become expensive because interest is generally charged at arelatively high annual rate and is usually not tax deductible. Understandinghow interest, interest-free periods and minimum repayments work can make iteasier to control the debt.
How Is Credit Card Interest Charged?
Credit-card providers quote an annual percentage rate, but interest can be calculated on outstanding balances according to the card’s terms. Different rates may apply to purchases, cash advances or balance transfers.
Moneysmart explains how to compare balances and interest rates and reduce credit-card debt.
What Is an Interest-Free Period?
Some cards offer interest-free days on purchases if the account conditions are met. If the balance is not paid as required, interest can apply under the card terms.
Cash advances commonly have different treatment and may begin accruing interest without the same interest-free period.
What are The Problems With Minimum Repayments?
A minimum repayment keeps the account up to date, but only part of the payment may reduce principal once interest and fees are charged. Paying only the minimum can therefore keep a balance outstanding for a long time.
How Can You Reduce Credit Card Interest?
- Pay more than the minimum where affordable
- Direct extra money towards the highest-rate card
- Avoid new purchases while repaying the balance
- Review fees and interest rates
- Consider whether a lower-cost structure is appropriate
What About Balance Transfers?
A promotional balance transfer can reduce interest temporarily, but check the transfer fee, promotional period, rate after the offer ends and interest charged on new purchases. A balance transfer only helps if the underlying debt is repaid rather than rebuilt.
When Is Credit Card Debt Becoming a Problem?
Warning signs can include relying on cards for everyday essentials, balances increasing despite regular payments or using one credit facility to make payments on another.
Build a Repayment Plan Around the Whole Budget
At Setch Group, credit-card repayment is considered alongside essential expenses, emergency savings and other debts.
If credit-card repayments are absorbing too much of your household cash flow, complete the Setch Group Financial Healthcheck.
Frequently Asked Questions
Does paying the minimum avoid interest?
No. The minimum keeps required repayments up to date, but interest can still be charged on the outstanding balance.
Is a balance-transfer card always cheaper?
No. Compare fees, promotional terms, the revert rate and your ability to repay the balance during the offer period.
Should I close a card after paying it off?
That depends on your circumstances, fees and borrowing habits. Reducing available credit can help some people avoid rebuilding debt.
This article contains general information only and not financial advice.
