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Smart Money

Using the Repayment-by-Purchase Method to Crush Credit Card Debt

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Over the past 2 years, COVID has made its mark on all of us. To varying degrees, many of us have experienced change in the way we work, the way we socialise, the way we shop, and the way we travel. Some of us have even changed the way we pay, opting to go contactless at the checkout using our cards or phones, to prevent the potential spread of germs.

Throughout all this, we have seen some changes as inevitable – while others have perhaps been more surprising. Fitting squarely in the latter category is our relationship with credit cards. Or more specifically, the extent to which we have paid them down – and cut them up – during the financial instability caused by the pandemic.

Over the past 25 years, the average credit card account balance has risen steadily year by year. Back in 1995, the average balance per card in Australia was $864. By 2019, that amount had risen to $3,264 (1).

In the year that was 2020, that trend of ever-increasing credit card debt reversed dramatically. According to figures issued by the Reserve Bank, the total amount owing on credit and charge cards in Australia in October 2020 was $37.8 billion (2). Compare that to October 2019’s total, and you can see that Aussies paid down a staggering $11.7 billion on their card balances throughout the year.

In terms of individual credit card balances, the average balance dropped to $2,868 by the end of 2020, falling $396. But, while this is certainly great news, debt is still debt. It’s something we need to pay down, or risk getting caught up in, paying more and more in interest as we go. So then, what’s the solution?

The Struggle with Debt

There’s no denying a credit card can be a seriously handy tool. Whether you use your card every day to rack up points and take advantage of perks, or simply keep it in your wallet in case of an emergency, that card is there when you need it – doing the job you need it to do.

But, while your card is there for you, you need to make sure you are there for it. How so? Credit doesn’t come for free. If you carry a balance, you’ll pay interest on what you owe. If you forget to make your repayment or go over your limit, you’ll pay fees for the privilege. With that being said though, you can easily avoid those costs by doing right by your card.

That means keeping a close eye on your account, avoiding overspending, making your repayments on time, and always paying your balance in full. Sounds easy, right?

Unfortunately, no. Whether as a result of making a few bad decisions, or simply not knowing how to keep on top of credit, it’s all too easy to end up with a balance that you simply can’t pay off at the end of the month. The stats show that currently, the average credit card balance accruing interest is $1,523, which according to a recent survey, would take cardholders six and a half months on average to pay off (3).

All too often, cardholders who find themselves with credit card debt they can’t get on top of simply opt to pay the minimum. They can’t see a way of clearing their debt, and lose any motivation to pay it down. By paying the minimum, they avoid late fees and a hit to their credit score – but that balance doesn’t actually go anywhere.

Paying the Minimum

Let’s say you owed $8,000 on a credit card with an interest rate of 19% p.a. If you only made the minimum repayment on that card, it would take 46 years and 11 months to pay off the debt in full. On top of the $8,000 owing on the card, you would pay $25,716 in interest.

We think you’d agree, that is both a ridiculous amount of time to be in debt, and a ridiculous amount to pay out in interest. However, it doesn’t take into account that it’s quite likely you would also continue to spend on your cards, adding to the amount you have to pay back – and the interest accruing.

This debt cycle can be common among credit cardholders, creating a spiral of debt they see no way out of. Their balance is so big that they feel they can’t do anything about it – so they don’t. And they keep on spending. Without motivation to get on top of their debt, it just keeps on growing.

Using the Repayment-by-Purchase Method

When you look at your credit card balance, you see all the transactions you have made, but it’s likely you focus on the total amount owing. If you are able to repay the full amount, you do just that. If you can’t, you may put a smaller amount towards paying down your bill – or simply opt to pay the minimum.

Looking at the idea that paying down a credit card balance can be demotivating for cardholders who can’t clear their balance month-to-month, researchers in the United States came up with an interesting alternative. Along with his colleagues, Harvard Business School Professor Michael I. Norton, tested a method that lets consumers choose which purchases to pay off each month, calling it the ‘repayment-by-purchase’ method.

“There’s a strong default to making the minimum payment,” Norton argues (4). “Our goal was not to get people to pay off their debt in full every month because, of course, many people just don’t have the money to do that. It was just to see if they would move up a little bit every month off of that minimum payment, because over the longer term, that can have big implications for your overall wellbeing.”

How Does It Work?

Using the repayment-by purchase method, users are allowed to choose which transactions they want to pay down. So, instead of feeling overwhelmed by a huge list of transactions on their credit card statement – and as a result, feel there is simply no point making the effort to pay down the total – they can enjoy the satisfaction of clearing each transaction, one by one.

“Instead of a list of purchases that you can do nothing about, and you just feel bad, now you have a list of purchases, and you can decide which ones you want to get rid of,” says Norton.

Depending on how you want to play it, you could choose to pay off the smallest purchases first, clearing lots of those so you feel like you have made some progress. Alternatively, you could choose to pay down the oldest transactions, to clear away those that have cost you the most in interest. Or, you could pay down larger transactions, such as flights. It’s up to you.

Putting It To The Test

In Norton’s paper, Repayment-by-Purchase Helps Consumers to Reduce Credit Card Debt, he and his team reveal a number of experiments carried out to gauge the effects of using their method. Within their first three experiments, they tested hypothetical situations with research participants. Their last experiment was tested in the field, using volunteer cardholders at CommBank.

Time and again, the experiments showed positive results when test subjects used the repayment-by-purchase method. In fact, during the experiment with CommBank, the results showed that cardholders who were given the opportunity to allocate their payment toward specific purchase categories paid 12.18% more toward their debt balance than customers who allocated their payment toward their total balance.

Here’s how it worked.





Why Does It Work?

While the CommBank experiment was slightly different to the individual repayment-by-purchase method put forth by the paper – instead allowing cardholders to repay by category – it seems that this approach to paying down credit card was successful. But why? Why does this method work better than the standard way of paying down a credit card balance?

In their paper, the researchers suggest that when using the standard method, there is too much of a divide between the purchase and the payment, which demotivates cardholders from paying more than the minimum.

In contrast, the repayment-by-purchase method ‘recouples’ purchase and payment, while breaking down the debt into smaller, more manageable chunks. On top of that, it offers cardholders visual progress as they pay down their debt, making purchases ‘vanish’ from their statements as they pay them off.

Within the research paper, four main reasons why the repayment-by-purchase method is successful are highlighted.

Cardholders benefit from an increased awareness of their purchases

Faced with a long list of transactions, it can be all too easy to gloss over them without really reading each one in turn. However, with the repayment-by-purchase method, you have to look at each transaction individually to decide which ones you want to pay down. This has the ‘recoupling’ effect mentioned earlier, closing the gap between using your card and paying it off.

This offers two potential benefits. First up, you are paying closer attention to your transactions – and making the decision to prioritise which ones you want to pay down. You are paying specific attention to your debt, rather than brushing aside the concept of having debt as a whole.

Secondly, with a heightened awareness of your transactions, you may make wiser choices as you spend. When you use cash, you feel the loss of handing over that money. When you pay with card, you are more distant from the payment, which can result in you spending more. On the other hand, when you paying closer attention to your transactions, it could prevent you from using your card where you shouldn’t going forward.

Cardholders feel like their debt becomes more manageable

When you look at your credit card balance as a whole, it can feel like it’s too much to deal with. Why bother making the effort to pay it down, when it hardly makes a dent on that big old balance?

With the repayment-by-purchase method, your debt is broken down into smaller chunks. Not only does this make your debt feel easier to manage, it also allows you to focus on paying off each transaction as and when it suits you. Want to pay down your holiday? Done. Want to clear your supermarket spending? Done. Want to get rid of those little purchases? You got it.

Cardholders benefit from a sense of accomplishment

Your credit card statement arrives and you can’t help but feel bad about it. The balance is too high, and you spent more than you should. With this type of thinking, it becomes easy to get demotivated. You avoid looking at your statement, and don’t see the point in paying it down.

In contrast, the repayment-by-purchase method is designed to offer you the motivation to keep chipping away at your balance, allowing you to develop a sense of accomplishment as you clear purchases one by one. So instead of seeing only a small amount being subtracted from your overall balance, you can see each of your transactions disappearing as you pay them off.

This sense of accomplishment works to encourage you to pay off even more, clearing more and more transactions whenever money becomes available to do so.

Cardholders want to pay down more

Using the repayment-by-purchase method, you have a closer relationship to your transactions, and pay much closer attention to each one. Your debt is broken up into smaller chunks and becomes less daunting and more manageable. You enjoy a sense of accomplishment as you pay down each of those transactions, to feel better about yourself and your actions.

All that leads to one central outcome: you pay off more of your credit card balance than you otherwise would.

Are There Any Potential Downsides?

Having talked up all of its benefits, it’s now time to look at the potential drawbacks of using the repayment-by-purchase method. The research paper points to two potential problems cardholders using the method could encounter:

  • Some cardholders may narrow their focus too much, to become overly focused on paying down one certain type of purchase, to then forget about paying down the balance as a whole. The paper uses the example of a cardholder focusing only on paying off small transactions, creating the illusion that they are progressing in paying off their debt, without actually experiencing much progress at all.
  • Another issue could come from the complexity that comes with making a decision. Some cardholders may struggle to decide which transaction to pay down first, leading them to put off making a choice altogether. Given too much choice, they may end up making no choice at all.

Trying Out Repayment-by-Purchase

CommBank may have participated in the research study, but as far as we are aware, there are currently no card providers in Australia offering a repayment-by-purchase option as a way to pay down standard card balances. But, that’s not to say you can’t give it a go yourself.

If you have a credit card balance you want to pay down, take time to look over your credit card statement, paying particular attention to each transaction. You can choose to focus on a particular type of transaction; transactions from a particular retailer, transactions from a specific event – such as a holiday – or transactions big or small.

Work out which transactions you want to pay off, then calculate the total amount you will need to transfer. While you won’t get the satisfaction of seeing each transaction physically ‘disappear’ from your account, you can still use the method to make your debt more manageable, to ‘trick’ yourself into paying down more than you otherwise would.

Other Methods of Paying Down Debt

Not sure the repayment-by-purchase method is for you? Why not try these methods of paying down credit card debt instead?

  • Make Regular Repayments: With this method, you don’t wait for your statement to arrive to make a payment. Instead, you access your online account once a week – or more regularly, if you wish – and make a payment to pay down what you can. Doing this on a regular basis allows you to chip away at your balance, helping you get on top of it faster – removing that feeling of dread that comes with only seeing your balance when your statement arrives at the end of the month.
  • Using the Snowball Method: Using this method, you pay off your debts in order, from the smallest to the largest. Starting by making the minimum payment on all your accounts, you then put as much as you can towards the account with the smallest balance. Once that’s paid off, move your efforts to the next smallest debt, continuing in this way until all your debts are paid off. Like a snowball, you start small, getting motivation from small wins to continue on towards becoming debt-free.
  • Using the Avalanche Method: This method works in much the same way as the snowball method, except you focus on paying off the debt attracting the highest interest first. While this may not offer as many small wins from the start, it can result in you paying less in interest, so you pay less overall and get out of debt faster.
  • Using a Balance Transfer: With a balance transfer card, you can transfer the balance from a number of different sources – credit cards, store cards and sometimes personal loans and hire purchase – to take advantage of zero interest over an introductory period as you pay down your debt. You have to be disciplined when using this method, as there is no set repayment schedule. If you fail to pay off your transferred balance within the intro period, you may end up in a worse position with your debt than you were before.
  • Using a Debt Consolidation Loan: With this option, you consolidate your debts into one personal loan, which you then pay off over a set period of time. Doing this can reduce the stress of dealing with multiple debts, while also allowing you to spread the cost over a longer period with a manageable repayment schedule. There are interest costs involved, however, and you may end up paying more in interest if you stretch your loan term too far.
5. Photo source: Getty images

Pauline Hatch

Pauline is a personal finance expert at, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.

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