How to get out of a credit card mess
By Jackie Pearson
17 September 2008
If you have multiple credit cards that are all heading towards their maximum limits there are strategies you can use to reduce your debt, writes Jackie Pearson.
Reserve Bank Governor Glenn Stevens has declared that household debt is now growing at a slower pace than it has for many years. In fact, in a recent speech to the Australian Institute of Company Directors he questioned whether we might be approaching the end of a “long period of gearing up by households”.
According to the September 2008 Reserve Bank Bulletin Australians currently owe $44.4 billion on credit cards. Governor Stevens is happy because that amount fell from $44.46 billion in June. The latest stats look like we’re making an effort to start to repay some of our credit card debt but reading between the lines, with total household debt at an enormous 158% of disposable income, many of us are living close to the edge with our credit habits.
Clear your debt
The first step towards stopping yourself from getting in over your head with credit cards is to recognise that they’re becoming a problem. According to the RBA the average credit card balance is around $3200. Now that doesn’t seem unmanageable until you consider the number of people using (and filling up) more than one card.
Nicole Rich, director of policy and campaigns for the Victorian Consumer Action Law Centre, says the centre is currently seeing a lot of cases where people have taken on too much debt that often involves credit cards.
“Some people are really struggling at the moment and may be relying on credit cards to help with other debt problems such as their mortgages but credit cards are not a healthy tool for managing those problems,” says Rich.
“If you’re having problems paying your energy or water bills talk to the company so they can help you with a repayment plain. It’s a much better way to deal with the problem than paying the bill with a credit card and then continuing to struggle with that debt,” she says.
Head of corporate affairs for Members Equity Bank, Tony Beck agrees that working families have been hardest hit by 14 interest rate rises, fuel and health cost increases.
“Many families are relying on credit cards to pay for recurrent household expenditure such as weekly groceries and fuel costs when ideally you want credit cards to be for incidental expenditure,” says Beck.
Choosing the right card
The good news is that once you’ve recognised your credit card spending is a ticking financial time bomb, not to mention costing you a bomb in interest, there are strategies you can use to prevent an explosion. And they may not be as painful as you think.
According to Tony Beck the most important thing is to make sure you have the right type of card.
“If you’re a revolver and not clearing your debt within the interest-free period, the most important thing is not the reward scheme, it’s the interest rate. Cards with points and reward schemes encourage spending on the credit card and usually come in with much higher costs than low-rate cards.
Nicole Rich says another important step in getting your credit cards under control is to resist offers to increase your credit limit.
“We’ve had cases where over time people keep accepting offers from their credit card provider to increase their credit limit. Over time they’ve ended up with huge credit limits which they then use,” she says.
Rich says in order to kick bad credit card habits you need to make a budget to determine how much you make each month, how much you spend and what money you have left over to start paying down your debts.
“If you have multiple cards and you are a disciplined person you should start by paying off the card with the highest interest debt. By making regular payments and not putting new purchases on a card you can eventually reduce the balance to zero and then you can chop that card up and move on to the card with the next highest level of interest debt.
Rich says Consumer Action is “wary” of balance transfer offers: “It’s human nature to be over-confident on your ability to pay off the debt within the 0% interest period,” she explains.
Transfer your balance
The best two currently available balance transfer offers are the St George Bank Vertigo Credit Card and the Aussie Master Card. Let’s say you had a $10,000 balance that you wanted to transfer to the Aussie Master Card and completely clear within the six month interest-free period.
You would need to be able to pay back $1700 every month for the six month period in order to clear your debt. If your transferred balance was $5000, your monthly repayments would need to be $834 to completely clear the debt within six months. Fortunately these two cards also have some of the lowest interest rates available to make it easier to keep paying off your debt if you don’t make it during the interest-free period.
Related Links