Millions of credit cardholders face being in debt for almost 25 years if they make only the minimum repayments on their credit cards each month, new research shows.
Latest Reserve Bank data reveals that Australians owe more than $50 billion in credit card debt – or around $3282 per card.
Michelle Hutchison, spokeswoman for RateCity, said the real number that matters with credit cards is not the initial spend, but rather the balance accruing interest.
“We did some research about the true costs of unpaid credit card debt and the results were pretty surprising – even a little scary,” she said.
RateCity found it would take 24 years and five months to repay the average credit card bill of $3282 if making only the minimum repayment each month. The figures were calculated using an interest rate of 17.21 percent, which is the average rate of all personal credit cards in the RateCity database. The situation is obviously much worse for cards with higher rates, such as some rewards credit cards
“Another way to think about the size of the mountain you climb in paying off a $3282 credit card bill slowly is this: if you just paid 2 percent of the balance every month, you’d end up paying almost $10,000 – including the original $3282,” she said.
“I can think of better ways to spend $6430 worth of interest than forking out dead money to your institution – that’s equivalent to an overseas holiday or even a good chunk towards a house deposit.
How to put a dent in debt
If you’ve got yourself into a bit of a credit card hole, the number one way out is to pay the debt off faster.
RateCity calculations show that increasing monthly repayments from the 2 percent minimum to 4 percent of an outstanding balance has a huge impact. On a $3282 debt at 17.21 percent, paying 4 percent off every month will see you clear the debt in eight years and seven months, and reduce the total interest to $1663, as opposed to almost 25 years if you only repay 2 percent.
What many cardholders may not realise is if you fail to pay off a debt in full each month, and carry a balance over to the next billing cycle, you may forfeit any interest free days on new purchases until the balance is repaid.
Getting into a credit card debt is a trap many Australians fall into at some stage of life. The real test, Hutchison says, is whether you’ve got the discipline to pay your way out of that trap.
“Refinancing to a lower interest rate option could help to ease some pressure on repayments. For instance, while the average personal credit card interest rate in the RateCity database is 17.21 percent, personal loans with interest rates below 10 percent are available through the site, so do your research, compare products, and take steps to reduce your liabilities today,” she said.