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- Antoine de Saint-Exupery

Sarah, a Melburnian who had racked up $3,482 on her credit card over a few years. She'd never heard of the French writer and aviator Saint-Exupery, but he could have been writing about her. Her desire to get clear of debt was real, but it had no focus because she didn't have goal.

On her card's monthly payment due date, Sarah never knew how much she ought to pay off. The interest rate was 16% p.a. How long would it take her to be debt-free if she paid off $200 every month? Or, if she wanted clear her debt before her wedding, 15 months ahead, how much would her monthly repayment need to be?

Having no idea, she usually ended up making just the minimum repayment of around $70. Her plan without a specific goal was just a wish, and at $70 per month it would have taken her nearly seven years to clear the debt.

Things changed for her when she discovered our credit card debt calculator. When she entered a repayment of $200 per month, the tool calculated that she would be debt-free in 20 months. Good, but not good enough. So she recalculated by entering 15 months of repayment as her specific goal. The answer: repay $257.66 per month.

And now she has a plan to get out of debt.

This case study is intended as a representative example.

How long will it take to repay a credit card debt of $5,000 if I make only the minimum monthly repayments?

It depends on your card's interest rate, the minimum monthly repayment percentage and whether or not you add to the debt with new purchases.

If your interest rate were 18% p.a. and the minimum monthly repayment 2%, it would take an astounding 33 years to repay your debt even if you didn't add to it with new purchases. And you would have paid $12,181 in interest by the time the debt was paid off.

Your monthly credit card statement will show how long it will take to pay off your current debt amount if you make only the minimum monthly repayments.

How is the minimum monthly repayment calculated?

Minimum monthly repayments are calculated as a percentage of your closing balance (e.g. 2%) or a fixed amount (e.g. $20), whichever is the greater.

So on a debt of $5,000 with an interest rate of 18% p.a. (1.5% per month) and a minimum monthly repayment of the greater of 2% or $20, the first month's repayment would be $101.50 (2% of $5,075, the new balance after interest charges).

The balance at the beginning of the second month would be $5,075 minus $101.50 = $4,973.50. This is slightly less than the original amount of $5,000, so the next month's 2% repayment would be slightly lower. The repayment amount would decline slightly every month until it reached a point, about 30 years later, where the 2% calculation would produce a figure less than $20. From then on, the $20 minimum repayment would apply until the loan was repaid in full.

Why is it a bad idea to make only the minimum monthly repayment?

The minimum monthly repayment does little more than cover interest charges plus a slight reduction in the debt. In the $5,000 debt / 18% p.a. interest / 2% monthly repayment example, the first month's repayment of $101.50 is mostly swallowed up by interest of $75. This ratio of interest charges to debt reduction is maintained throughout the life of the debt if you make only the minimum monthly repayment amount, which declines as the debt is very slowly reduced.

But if you were to keep on paying $101.50 – 2% of the *original* debt – you would clear your debt much more quickly, in less than eight years instead of 33 years. That's because a steadily growing proportion of the fixed repayment amount goes towards debt reduction, as the debt amount declines.

I've used the Credit Card Debt Calculator to work out how much I need to pay per month in order to clear my debt in five years. How can I make sure I stick to the plan?

First of all, try to avoid adding more debt to your card. You have already lost your monthly interest-free days, which are forfeited when you have any unpaid debt on your card. This means that interest would be charged on each new purchase from the actual transaction date. New purchases, plus the extra interest charges, are only going to add to your debt and make it harder to repay.

Secondly, set up a direct debit from your bank account to pay off the amount indicated by the Credit Card Debt Calculator. This could be a single monthly payment, or fortnightly payments (divide the amount by two), or weekly payments (divide the amount by four), depending on how often you are paid. This will reduce your opportunities to spend the money you should be using for repayments.

I have debt on two credit cards. Should I pay off the same amount each month on both of them?

It depends on whether they both have the same interest rate. If they do, it doesn't matter which one you repay faster. You could pay off the same amount on both, or make just the minimum repayment on one and concentrate on making bigger repayments on the other to clear at least one debt more quickly.

But if the interest rates are different, make only minimum repayments on the lower-interest card, and pay off as much as you can afford each month on the higher-interest card. Once the higher-interest debt is repaid in full, you can switch your extra repayments to the lower-interest card. By using this strategy you'll pay less interest and be debt-free sooner.

Are there any tips for paying off credit card debt faster?

Yes.

- If you're struggling to repay your debt, stop using your credit card. Pay cash instead, and buy only what you can afford.
- If you have debt on more than one card, work out which one has the highest interest rate and concentrate on repaying that debt first.
- Consider consolidating your debts by applying for a new card with an introductory zero-interest offer on balance transfers. Preferably choose one with a lower-than-average revert interest rate in case you can't repay your debt in full before the offer's expiry date.
- Set a repayment goal by using our Credit Card Debt Calculator to work out the monthly repayment required to clear your debt in your chosen number of months.
- Organise a direct debit to make the required monthly repayment from your bank account.
- Make a budget showing your monthly income, essential expenditure, occasional treats, and your credit card repayment. Try hard to stick to it.
- Don't keep money in a savings account if you have credit card debt. You're paying a far higher interest rate on your debt (possibly as much as 20% p.a.) than you are earning on your savings (maybe 3% p.a.). Use your savings to pay down your debt. When your debt is cleared you can start saving again.