January 27, 2010
The new year is a dangerous time for Australian credit card users. Thousands are entering 2011 with record high rates and balances to make them wish for a repayment miracle. Now that your interest free days are slipping away, what's the best way to redeem your holiday splurge?
In December 2010, the Reserve Bank of Australia (RBA) showed rates for the large credit card providers are at a two-year record of 19.70 percent for standard cards, and an all-time high of 13.65 percent for low-rate credit cards. According to RateCity's database of almost 300 personal credit cards, the average rate is 17.43 percent.
With an average balance of $3245 according to the RBA, credit card users wishing to wipe their debts by the end of this year will be paying about $300 a month at 17.43 percent in repayments.
If you drag your feet with the payments over five years instead of one, you will end up paying an extra $1300 in interest.
The trick to plugging your credit debt
This demonstrates the real magic in saving money on your credit debt this year. By comparing and switching credit cards online, you can save hundreds for the next spree at year's end.
Popular methods to do this include consolidating several credit card debts into one, or applying for a balance transfer to gain an interest rate reprieve.
Balance transfers can reduce the interest on your holiday debt from its record highs to around 3 percent - or zero interest for up to six months according to RateCity, which can cut your interest payments six-fold while you plan a route out of your debt maze.
The risk with balance transfer cards is that failing to pay by the end of the low-interest period can have dire consequences; when balance transfer cards revert to their normal interest rates (in some cases even higher than your original card), being stuck with a high balance can see you lose all of the savings from the discounted transfer.
Another common mistake is upgrading your rewards program, which is natural for credit card users who think that it will help discount their rising spending habits. In reality, many of these programs offer rewards at the cost of higher interest rates, which in effect has you paying more for your own "discounts".
This January, you may hear dozens of "wonder cures" for your credit card debt, but savvy Australians plan their own miracles by switching cards online and setting short-term goals to minimise their interest. Make this month count, and compare credit cards for the lowest rates today.