How Credit Card Minimum Payments And Interest Are Calculated

A credit card gives you the convenience to purchase things without having to carry cash. However, it also requires you to spend responsibly as you should clear your credit card bills in full, and on time – in order to avoid interest charges and late payment fees.

So as a credit cardholder, it’s important to pay off the amount listed under “Outstanding Balance” in your monthly e-statement, which will be emailed at the end of your billing cycle. (You can also access your statement via online banking.) Also known as “Current Balance” or “Total Balance Due” by different banks, this is the total amount that you owe.

Besides “Outstanding Balance” and the list of transactions you’ve made with your card, your statement features a smaller figure under “Minimum Payment Due”, which is the very least you need to repay monthly.

Related: What’s The Right Credit Card for You? A Guide According To Your Life Stages

How to calculate your credit card minimum payment

There are two factors that play a key role in determining your credit card minimum payment: your outstanding balance and the interest charge.

Banks generally use this formula to calculate the minimum monthly payment for your credit card: 5% of your outstanding balance or a minimum of RM50 (whichever is higher).

This example will give you a clearer understanding of how much you’ll have to pay for your credit card minimum payment:

So the minimum payment you’ll have to pay for this month would be: 5% x RM3,000 = RM150.

You can choose to pay only your credit card’s minimum payment but there will be negative consequences to your finances...

You can choose to pay only your credit card’s minimum payment but there will be negative consequences to your finances – such as having to service more debt because you’ll be charged interest.

Related: Ultimate Guide On Using Credit Cards Responsibly

If I only make the minimum payment, will I get charged interest?

Yes, credit card interest is charged to your remaining outstanding balance when you don’t pay your bill in full each month. As most credit cards issued by banks charge an interest rate of 15-18% per annum, you’ll end up taking a longer time and using more money to settle your bill.

Let’s say you have an outstanding balance of RM3,000 for your credit card, which has an interest rate of 15% per annum. What’s more, you can only afford to pay RM150 a month instead of settling your bill in full. According to the online credit card calculator on Calculator.com.my (a Malaysian platform that also provides online calculators for home loans and car loans), this the amount you’ll be paying in the following months:

Total principal paid: RM3,000
Total interest paid: RM473.84
Monthly payment: RM150/month
Months to pay off: 24 months

Thus you’ll be paying an additional RM473.84 in total interest over the 24 months it’ll take for you to pay off your credit card bill.

Imagine the amount of nasi bungkus, Netflix subscriptions and electricity bills that RM473 can be used for. You could have also deposited the funds into your savings. There’s so much you can do with the money saved from having to pay credit card interest charges, so you should always repay your bills in full.

What happens if I can’t even pay the minimum amount?

1. Increased interest rate

When you can’t settle the minimum payment for your credit card, the banks can increase your interest rate. Based on Bank Negara’s credit card interest rate structure, cardholders who pay their bills on time are rewarded with a lower interest rate, while people who miss their credit card payments will be charged a higher interest rate.

Bank Negara’s tiered interest rate for credit cards

Tier 1: Maximum of 15% per annum (for those who promptly settle their minimum payment due for 12 consecutive months).

Tier 2: Maximum of 17% per annum (for those who promptly settle their minimum payment due for at least 10 months in a 12-month cycle).

Tier 3: Maximum of 18% per annum (for cardholders who do not fall within the above categories).

2. Late payment fees

If you’re unable to even make the minimum payment before your payment due date, banks will usually impose a late payment charge of RM10 or 1% of your total outstanding balance (whichever is higher). If you continue to miss your payments, this late payment fee, along with the interest charges, will cause your credit card debt to balloon.

3. Bad credit score

Your track record of missed payments will appear on your credit reports, which are generated by credit reporting agencies. When these agencies calculate your credit score, a three-digit number that represents your creditworthiness and how likely you are to repay debt, you’ll most likely get a lower score. This in turn will affect your chances of getting any future bank loans and credit card applications approved, as banks are less willing to take a risk on you.

A poor credit score can affect your chances of getting any future bank loans and credit card applications approved, as banks are less willing to take a risk on you.

Related: How Credit Cards Can Affect Your Credit Score

I can’t manage my credit card debt. What should I do?

1. Apply for a balance transfer credit card

A balance transfer lets you transfer the outstanding balance on your existing credit card to a new card – thus saving on the interest charged for repayments.

Let’s say you have two credit cards and your total debt is now RM20,000. As you can’t afford to pay your balance in full, it grows month after month at an interest rate of 15% per annum.

By getting a balance transfer credit card, you can transfer your existing RM20,000 debt to a new credit card and avoid paying interest. What you’ll pay instead, is a 0% interest 12-month instalment payment of RM1,667 to your new bank. After 12 months, you’ll be able to finally finish paying your RM20,000 bill.

You can apply for a suitable balance transfer credit card that helps you get out of debt here.

2. Get a debt consolidation loan

If you have been struggling to pay off your credit card debt or bank loan, you can apply for a debt consolidation loan with banks.

Established with the purpose to help borrowers get out of debt, a debt consolidation loan enables you to combine all your debts into one loan at a single interest rate.

For example, you have three credit cards with an interest rate of 15%, and each card has an outstanding of RM5,000. With a debt consolidation loan, you can simplify all these by combining your debts into one. Besides being much easier to manage, you can also save money in the long run if your previous debts have higher interest rates.

Interested in finding out more? You can compare Malaysia’s best debt consolidation loans in 2021 and calculate which one would suit your repayment ability here.

3. Contact AKPK for free financial advice

When it comes to managing debt, you’re not alone. You can always contact Agensi Kaunseling dan Pengurusan Kredit (AKPK) or the Credit Counselling and Debt Management Agency for help. This organisation can help rebuild your credit and offer financial counselling for free.

Under AKPK’s Debt Management Programme (DMP), its counsellors will work with you to develop a personalised debt repayment plan. They are also able to negotiate with banks to get a restructured repayment plan which is more affordable for the borrower.

You can find out more about the DMP here, or if you’re ready to apply for this programme, please complete the online application form.

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