Jack Han investigates the best options for reducing your Christmas credit card debt.
January 20, 2010
By the time the Christmas decorations are packed, most Australians will be receiving the result of their holiday spending in the mail – the dreaded credit card bill.
Luckily, the New Year is a great time to begin paying off your debts, as financial institutions scramble to attract new customers with promotional offers.
The most common deal that Australians are seeing is the balance transfer offer, which allows you to transfer all of your credit card debt to a lower rate card for a limited period.
This means that customers paying interest rates as high as 19 percent can switch to repayments on rates as low as 0 to 3 percent for a period of time.
On the average credit card balance of $3,141 for example, a rate of 19 percent can be paid off within a year through monthly payments of $289 (not including fees), whereas a 3 percent rate would only require $175 a month for the debt to be cleared in a year – that’s a savings of $114 a month or $1,368 in a year!
Alternatives to easing the Christmas credit card debt are to consolidate it into other loans, such as personal loans and mortgages.
The high interest rate of personal loans make it an unattractive option, so many Australians choose to use their home loans to absorb their credit card bills.
However, the danger of this is that borrowers will simply forget the debt, and succumb to higher repayments on their home loan. This means that they will be effectively paying off interest on their credit card bill for up to 30 years.
Therefore, it is crucial to reciprocate consolidation plans with extra repayments to offset the higher interest payments.
Another debt clearing faux pas is accruing more credit card debt once you have consolidated your current one. The temptation is high, because consolidating your balance will feel like ‘removing’ it from your credit card statements, when in reality you have simply transferred it somewhere else.
To get a head start on clearing the Christmas debt, many Australians are re-selling their unwanted Christmas gifts, recuperating hundreds of dollars for households.
If you are one of the many Australians with a credit card headache after Christmas, shop around online to find the lowest interest rates on balance transfers and loan consolidations, simply by comparing credit cards. Once the bills are paid, take this as a lesson for Christmas in 2010 – perhaps the best way to spend the holiday is to start saving for it now.