When making a credit card payment, be careful to pay the right amount. There’s a closing balance, a minimum payment, a monthly payment, and part payments. Which one should you choose? Just paying the lowest of these could, ironically, cost you more in the long term.

Give me the main points

  • The surest way to avoid interest is to pay off your ‘closing balance’.
  • ‘Part payments’ reduce your balance and interest. But you won’t get interest-free days in your next statement period.
  • The ‘minimum payment’ is the amount you’ve agreed to pay each month (in your contract).
  • The higher your closing balance, the higher your monthly payment will be.

Paying off your ‘closing balance’

If you can afford it, you should pay off the closing balance in full by your statement’s due date. This is the total amount you owe for that statement period, including interest and purchases. If you pay your closing balance in full by the due date, not only do you not pay interest on the purchases you made that month, it also gives you interest-free days for purchases you make in the next month (as long as you continue to pay the full closing balance each month).

But, we understand that paying off the closing balance mightn’t be possible. So, your next option should be to pay off as much as you can above your minimum monthly payment. We’ll call it a ‘part payment’.

Making a ‘part payment’

While it’s more than the minimum payment amount (which we’ll touch on shortly), making a part payment doesn’t pay off the full closing balance. This means you won’t avoid paying interest completely by making a part payment.

There are pros and cons to making a part payment.

Your goal when making payments is to reduce your balance and interest—making a part payment will help you to do this. Doing so also keeps your card below the approved credit limit and helps you avoid late payment fees.

But because you’re not paying your statement off in full (your ‘closing balance’), you’ll still be charged interest and interest-free days on purchases won’t apply for the next statement period. Plus, interest from the previous month will be charged—that’s a month’s worth of interest calculated on your daily balance. This all means you’ll be paying interest on every purchase on your statement.

Making ‘minimum’ or ‘monthly’ payments

Sometimes your monthly payment and total minimum payment will be the same amount. But sometimes they won’t.

Minimum payment

The total minimum payment is the total of the monthly payment and any past due or over-limit amounts that you’ll have to pay before the due date. This is the minimum contracted amount you’ve agreed to pay each statement. Paying at least this amount by its due date helps you avoid a late payment fee (so you can keep using your card).

But the downfall is it’ll take a long time for you to pay off your balance. Even if you’ve reached your credit limit and stop using it for purchases, the interest will increase as long as there’s a balance to pay off.

And what if you’re paying less than the minimum amount? This will work against you. Not only will you still pay interest, but you’ll be charged a month’s worth of interest calculated on your balance for each day of that statement period. And you’ll lose your interest-free days for the next statement period. And if you didn’t pay your balance in full for the previous month, you could now be paying interest on interest. It adds up. Paying less (now) means paying more (eventually).

If you’re struggling to pay off your card, you need to talk to us as soon as you can. If so, head over to our Financial Hardship section. We’re here to help however we can.

Monthly payment

A monthly payment is the amount due from purchases and transactions you’ve made during your monthly statement period. We work this out by looking at your closing balance for that month.

If your closing balance is:

  • more than $1,250, your monthly payment is 2% of the closing balance
  • $25 - $1,250, your monthly payment is $25
  • less than $25, your monthly payment is the full balance amount.

But how much you pay does make a difference in the next statement period, because…

Interest is calculated daily

The daily interest is based on that day’s closing balance. That’s the total of everything you haven’t paid back (including fees, purchases, cash advances and balance transfers), plus any interest charges.

By making a part payment, you reduce your opening balance for the next statement period. But because you haven’t paid the balance in full, you won’t have any interest-free days, so you’ll still get charged interest every day based on the daily closing balance. So by making a bigger part payment you’ll reduce your daily balance, which reduces the amount of interest you’ll pay.

The only way to prevent interest charges adding up is to pay your closing balance in full. It’s the only way to get your interest-free days on purchases for the next month.

Important information

Credit cards issued by National Australia Bank Limited. © 2016 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686

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