The festive season may be little more than a fond memory for most, but the thousands of Australians still carrying Christmas credit card debt are being warned: pay up or face a nasty reminder.
This time of year is typically the most expensive for credit cardholders as they come off interest-free days following the peak spending season. However, balances accruing interest spiked in December 2011, up more than half a billion dollars compared to the same time in 2010.
Damian Smith, chief executive of RateCity, says Australians spent almost $23 billion using their credit cards in December, $690 million more than in November.
“Last year credit cardholders had a combined $488 million more debt costing them interest after December 2010, which was about $2400 per credit card.
“By December 2011, there were almost 200,000 more credit cards in Australia (compared to January 2011) and December saw the highest number of transactions ever recorded with more than 162 million, so there’s little doubt that credit cardholders will be in for an expensive month,” he says.
Most credit cards offer an interest-free period, which is the number of days from when the statement is issued (not necessarily the date of purchase). According to RateCity’s database of more than 200 cards, 93 percent offer an interest-free period with the most common number of interest-free days being 55.
Credit cardholders could cut bills dramatically by comparing credit cards and switching to a more suitable option, says Smith.
“There are many credit cardholders, which don’t realise how much money they’re wasting by using a credit card that doesn’t suit their spending style. For instance, we found 14 credit cards in our database that offer no interest-free period on purchases,” he said.
However, some of the biggest savings may be found by simply making higher than the minimum repayments.
Credit cards on average require a minimum repayment of 2.41 percent, but the majority of cards impose a minimum monthly repayment of just 2 percent. Someone with a card debt of $5000 repaid at a rate of just 2 percent per month would take them 29 years and 4 months to clear it and cost them over $6500 in interest – and that’s based on a low-rate card of just 14 percent. The situation is obviously much worse for cards with rates in the high teens, such as many rewards cards.
Increasing the minimum repayment to just 3 percent, from 2 percent, could halve the time it takes to repay a $5000 card balance saving over $3500.
“If you’ve blown out your credit card debt from the holiday season, make sure you compare your cards to the latest deals on the market and consider a balance transfer to save even more. But make sure you pay off your debt during the introductory period or you could end up paying even more than necessary,” said Mr Smith.