Credit card debt creeps up on you
OUR economy is getting back on track, but many households are still struggling to make ends meet. Recent research shows credit cards are being used to fill the cash gap.
ING DIRECT’s quarterly Financial Wellbeing Index shows that credit card debt is gradually creeping up. Outstanding card debt rose by around 24% over the last three months, taking the median card balance per household to $2,072.
This may not sound like much but medians and averages mask individual situations. The same research showed 14% of cardholders are uncomfortable about their card debt – and among these people, the median card balance was a whopping $8,500.
The concern here is that we are approaching the festive season – one of the peak spending periods of the year. That makes it important to tackle card debt now, rather than letting the balance escalate over the holiday period.
First, take a look at the interest rate you’re paying on your card. You’ll find this on your latest card statement. If it’s above 15% it may be worth switching to a card with a lower rate. Websites like www.ratecity.com.au show the rates applicable to a variety of cards.
If you have a rewards based card, chances are you are paying a high rate – possibly around 20%. If that’s the case and you carry an ongoing card debt, your ‘rewards’ are costing you dearly in terms of high interest charges. So give the rewards a miss and save with a lower rate card.
If you think you can pay the card off in a short time – say, six to 12 months, it could pay to take advantage of a balance transfer offer. Be aware though, the very low (or zero) introductory interest rate is typically replaced with a far higher rate further down the track. So these offers are not well-suited to cardholders who’ll struggle to clear the card balance in the low rate period.
If you’re comfortable with the rate you’re paying on a credit card, making extra payments is the key to clearing the balance.
To see how much of a difference extra repayments can make, check out the online credit card calculator at www.fido.gov.au – the consumer site of the Australian Securities and Investments Commission. The calculator, which you can download onto your own computer, is a real eye opener.
As a guide, if you stick to the minimum monthly repayments on a card debt of $2,000, at a rate of 18% it could take you over 30 years to pay off the balance. Over that time you’d have paid around $5,000 in interest alone. That’s because the interest charges grow the balance at a rapid pace while the monthly payments stipulated by the card issuer (usually just 2% of the balance) barely impact the debt.
On the other hand, paying an extra $100 off the card each month would see the slate cleared in just two years with an interest charge of about $400.
A final key step in getting credit card debt under control is ditching the card altogether. Accepting that your spending budget is limited by the balance of your bank account rather than the limit on your credit card can call for a change of mindset. But it goes a long way to staying out of trouble with credit cards.
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.