Credit card monthly payments
How credit card monthly repayments are calculated and what you should pay
If you’re new to credit cards and trying to find the best deal, it can be confusing comparing offers. Credit card issuers use a lot of financial lingoes that can often be difficult to understand.
If you plan to keep a balance on the credit card from month to month you must understand the minimum monthly payment due. The minimum payment is not always clearly outlined and can be difficult to find, however, it is a very important part of understanding whether you can afford a credit card or not. So as a consumer, how do you find out what the minimum payment on a credit card might be?
Firstly, let’s look at the definition of the minimum monthly payment. This is the smallest amount of money you can pay back on an outstanding balance of the credit card each month without incurring additional fees or negative repercussions on your credit score. For example, if your outstanding balance is R1,000 and the credit card company requires a minimum of 2% paid each month, the minimum monthly payment would be R20.
How is the payment calculated?
There is no standard way of calculating a minimum payment. Each credit card provider will use their own unique formula and criteria to determine the minimum monthly payment. There are two common methods consumers can use to calculate this payment and we will outline them below.
- Percentage method – Here, the credit card issuer will calculate the minimum payment as a flat percentage of the outstanding balance. Again, taking the above example where a flat 2% minimum monthly payment was required on the outstanding balance of R1,000 – meaning the minimum payment was R20.
- Percentage + Interest + Fees method – If you have a credit card where interest is payable and fees may be owed, you should include these in the calculation for the minimum monthly payment (in addition to the flat percentage rate). For example, if you incurred a late fee from a previous payment, that can be added to next month’s minimum monthly payment. Using the above example again, if a late fee of R50 was incurred, the minimum payments for this month would be the flat 2% (R20) + R50 = R70.
The only way to fully understand the minimum monthly payments that will be due on a credit card is to carefully read the terms and conditions attached to a credit card offer. A credit card issuer must outline all fees, charges and minimum monthly payments within the terms and conditions, so this is a very good source for understanding whether you can afford the credit card.
Always pay more than the minimum monthly payment
It is not recommended that you only pay back the minimum monthly payment. Firstly, only paying back the minimum monthly amount will mean that it takes you a long time to repay your debt on the credit card. Secondly, you need to consider the interest charges each month. By only paying back the minimum amount you will accumulate more interest over time, which could cost you a lot of money.
Take the example of buying a laptop worth R25,000 on a credit card with an APR of 15%, and only paying the minimum amount each month of 2%. This will take you 79 months to fully repay the debt and you will accrue R12,830 in interest – over half the original price of the item!
What’s more, if you continue to spend on the card when only making minimum monthly payments, you will not only get hit with interest charges but you will also be piling further debt on to yourself.
A final note on minimum monthly payments
0% Interest rate credit cards are usually conditional on you meeting the minimum monthly payments for the length of the offer. If you fail to make a payment, you will incur charges and the 0% interest period will likely end.
In conclusion, although it is recommended that you pay back more than the minimum amount each month, you are much better off paying back the minimum than nothing at all. If you can control your spending habits to allow you to pay off the full balance each month, you will be in a good financial spot.
How to avoid late credit card payments
It’s important to know if you are late with a credit card payment, that it could have adverse effects on your credit rating. Although being late with a payment is a mistake that we can all make, it’s not viewed positively. Below are some pointers on how to avoid late payments and how to recover from it should you spot one on your credit file.
1. Make use of automatic payments
The safest way to avoid the issue of missing a payment is to enrol in auto-pay. This is a direct debit where you authorise the credit card issuer to automatically deduct payments from your bank account on a particular date. Enrolling in automated payments is the safest way to mitigate the risk of missing a payment. You simply assign the credit card provider to debit above the minimum amount each month from your current account, which can be a lifesaver in situations where you find yourself very busy towards the end of the month. However, make sure you are paying more than the very minimum amount when you do it, as you’ll be susceptible to a higher rate of interest if you don’t. If you are somebody that possesses consistent levels of spending on a monthly basis, you might have the option with your creditor to pay the full amount off each month to avoid paying any interest. If this isn’t an option, some credit card issuers may allow you to set a fixed amount that’s more than the minimum.
One issue with auto-pay is that you must have the sufficient cleared funds in your account for this form of payment to be effective. If you don’t, you are likely to be charged additional fees if your payment doesn’t go through. The straightforward way to ensure you have enough funds in your account is to set up the auto-pay date, a day or two after your payday. That way in theory, you’ll have enough money in your account to clear the payment each month.
2. Assign yourself reminders
With the advances of technology in the modern era, it’s easier to set reminders and online alerts through our mobile phones than having to write things down on paper. It takes minutes to schedule all of your payment due dates through your online calendar, which syncs with your mobile phone. As long as you operate a smartphone, you’ll receive reminders on-the-go, so you’ll never have to miss a payment again, wherever you are. As an extra safeguard, you should sign up to online alerts. The credit card provider will send you an email notification 5 -10 days before your payment is due. It’s always advisable to check your online balance to ensure you have enough cleared funds in your account to make the payment.
3. Make weekly payments
Despite credit card payments being due at the end of each month, this could lead to a cash flow issue for some of us. If you use your card consistently each month, you might find it difficult to pay off your balance in full, whilst managing other outgoings, such as rent. This could result in a late payment or having to carry a balance on your card. Its very easy to fall into the credit card trap of “buy now pay later”, as charging items on your card with this outlook can get you into financial difficulties. If you want to avoid debt, you should only spend the money that you have today. To help you stay on course with your bills and on budget, consider making weekly payments to help with cash flow and avoid late payments or additional fees. Managing your money this way, will probably make you more conscious of your spending and force you into better budgeting habits.
4. Contact your credit card provider
In the event you miss a regular payment, the first thing you need to do is make the payment and then notify your credit card issuer. You should act quickly in order to rectify the situation. If you have been a customer of the card provider for some time, and the missed payment is out of sorts, or it’s the first time it’s happened, your card issuer may give the benefit of the doubt and waive the late payment fee. However, if it’s not the first time it’s happened, you should probably sign up for automatic payments and or stop using the cards entirely until the balance has been paid off. It’s just a matter of finding a method that works for you.