Having a credit card can seem like having access to free money for many Australians. But considering that we swiped our way to a new record of $49.41 billion in credit card debt in May this year, paying on plastic is a real issue.
For each adult with a credit card, RateCity calculated that’s a bill of about $3,000 on average, according to Reserve Bank credit card data. The figure increased by 4.11 percent since May last year, despite fewer credit cards being approved recently – there were 18,000 cards opened in May 2011 compared to 35,000 in May 2010.
What is more concerning than the total debt is an increase in the amount of interest we’re paying compared to last year, says Damian Smith, chief executive of RateCity.
“We’ve found that credit card balances costing card holders interest increased by almost 6 percent in May 2011 compared to May 2010 – that’s almost $2 billion more than in May 2010,” he says.
Around three quarters of credit cards went unpaid in part and earned interest in May this year.
The average purchase interest rate rose for credit cards in the RateCity database too, increasing by 40 basis points to 17.30 percent since May last year. As a result, credit card providers raked in about $531 million in interest in May 2011 – around $40 million more than May last year.
So Australians with credit cards are not only being charged higher rates of interest than last year, but are also paying more in interest from bigger debts.
Pay down debt
It’s not all gloomy news for Australians saddled with credit card debt. There are ways to reduce your balance, such as with a balance transfer credit card. There are several cards charging no interest for up to nine months on balances brought over from rival cards, including the Jetstar MasterCard, GE Money’s Coles Group Source MasterCard, Macquarie Bank’s Visa Gold Card and Citibank’s Clear Platinum Visa. Virgin Money’s Virgin Flyer Card offers zero interest up to nine months.
By switching from a card at the average purchase rate of 17.3 percent to one of these cards and knuckling down to repay your balance you could save yourself hundreds of dollars in interest.
Just be aware that many balance transfer credit cards switch to higher rates of interest following the zero interest periods, so you’ll need to repay the balance before the balance transfer period ends to really benefit. Some have higher purchase rates too, so the best advice is to avoid using a balance transfer card to make further purchases.
Finally, beware of fees – if you hold two credit cards simultaneously you may be paying two lots of annual fees, which can quickly add up.