Australians owe about $50 billion on credit cards so it’s little surprise that many users are being hit with hefty interest charges.
An online poll has revealed that cardholders are mostly split when it comes to paying off their credit card debt. A third of respondents pay their credit card bill in full by the due date, while a third do this only sometimes. The rest don’t pay off their card in full and, consequently, pay hefty amounts of interest.
Transactor or revolver – which are you?
Credit cardholders are usually split into one of two groups: “transactors” or “revolvers”. A transactor uses a credit card to their advantage and avoids interest by paying off their bill in full by the due date. Revolvers are the opposite – they are unlikely to pay off their card in full and end up forking out more in interest.
David Berry, nab’s acting general manager of cards and personal loans said the majority of credit card users do manage to pay off their card before interest hits.
“Approximately 55 percent of our customers pay their account off in full every month,” he told News Ltd. “Customers who have a large revolving balance should move to a low-rate card.”
ME Bank’s acting head of cards, Ian Turnbull, said the two types of card users are poles apart. And, he says, it can be difficult to move from being a revolver to a transactor.
“There’re behavioural things you can do but it comes down to the level of balance that you are carrying to work out how difficult it is,” he told News Ltd.
“In the extreme we are helping people through hardship, consolidating debts and moving it to the lowest interest rate, whether that’s a home loan, personal loan or cheaper credit card.”
How to be smarter with debt
RateCity did some research about the true costs of repaying a credit card and the results were pretty surprising, and more than a little scary.
If you took a low-rate credit card – say 14 percent – and only repaid your debt at the monthly minimum of around 2 percent, take a guess at how long it would be before you were debt free. A $1000 balance would take you over 13 years to clear, a $5000 balance nearly 30 years and a $10,000 balance a whopping 36 years!
RateCity CEO Alex Parsons, said some Christmas spending or an overseas trip might feel OK when you put it on plastic, but it’s just as much of a debt as borrowing for a house or car, and a lot more expensive in terms of interest rate.
But there are strategies to help you be smarter with debt, he said: “Look at your budgeting – you’re obviously spending more than you are earning.”
When choosing a credit card, consumers should look closely at the fees – many card users will be familiar with annual fees but these can easily be avoided as many cards simply don’t have this charge.
Under credit card laws, consumers can nominate their own credit limit – so cut it down to a manageable amount, he said.
“The number one way out is to pay the debt off faster, the simple act of moving from 2 percent of balance repaid every month to 4 percent can have a significant impact,” he said.
On a $10,000 debt at 14 percent, paying 4 percent off every month will see you clear the debt in 13 years, as opposed to over 36 years if you only repay 2 percent.
Another useful way to deal with a large credit card debt is via a balance transfer card, which allows you to transfer the balance across to another card – usually with no or lower interest – and close the first one down.
“Balance transfers aren’t a ‘get out of goal free card’ though. You still owe the same amount of money and if you don’t repay it in full during the honeymoon period, you may face a jump in interest rate back to, or even, above what you were paying before the transfer,” he said. “But if used correctly, a balance transfer can be a good way out to getting back on track with your debts.”
Getting into excessive credit card debt is a trap many of us fall into at some stage of our lives – the real test is whether you have the discipline to pay your pay out of the trap.