Clear the cards now, or in 30 years

Paul Clitheroe
Paul Clitheroe

IT'S scary to think you could still be paying for those 2011 festive season purchases in the year 2041. But that's exactly what can happen if you stick to the minimum repayments on your credit card.

It's about now that our card statements start to appear in the mail. For many Australians, bigger than normal card balances will be the legacy of a Christmas spending splurge. Just to add to the challenge of paying off the balance, our January card repayments tend to coincide with a raft of other bills including back to school costs.

At times like this it can be tempting to pay just the minimum amount off your card. But comparison site RateCity is warning that this could see you still paying for Christmas purchases in 2041. Yes, that's 30 years to pay off the kid's new trampoline or grandpa's new recliner.

The potential for this pitfall lies in the way credit card repayments are structured. The majority of cards require only 2% of the balance to be paid off each month. So, on the average card debt of $3,300 you may only be asked to make a monthly repayment of $66. The trouble is, if the card rate is 19%, the overall balance is growing by $52 each month, so you're only wiping $14 from the slate.

Even if your card's interest rate is 15% it would still take over 27 years to pay off the debt if you stick with the minimum payments. By this time you would have paid interest totaling $4,964 - and that's assuming no new purchases are added to the card.

If you can manage to pay $100 off the card each month, the debt would be cleared in under four years with a total interest cost of $982. That sounds like a money-saving option to me.

From 1 July 2012 government reforms will see card statements carry warnings about the implications of only making minimum repayments. I reckon it's a great idea as many people simply don't realise how much the cost of card purchases will blow out if you continue to let interest charges build.

Other worthwhile reforms will also be introduced. Borrowers will be able to nominate their preferred credit limit, and cardholders will be notified when they have exceeded their card limit with a choice of continuing to use their credit card or make a payment to trim the balance.
Until these reforms come into effect from mid-year, it is worth keeping a firm rein on card spending. It is one type of debt that can be very easy to build up, and extremely difficult to pay down.  For more ideas of ways to pay for purchases without racking up debt, take a look at my book Making Money.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. For more visit

Topics:  credit card debt opinion paul clitheroe

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