Signs you may have a debt problem

Australians have a complex relationship with debt. In 2014, RateCity found that 42% of young people under the age of 24 have between $10,000 and $30,000 of personal debt, not including a mortgage. More than half (56%) of Generation Y’s with a credit card were found to have never had a $0 balance on their credit card in the previous year, and 63% were not aware what interest rate they were paying.

While a certain amount of debt can prove useful for enjoying convenient access to goods and services you otherwise couldn’t afford (at least not without making a concerted long-term effort to save money), it’s all too easy for debt to get seriously out of hand. What’s worse, through no fault of your own, you may not even realise you’re in trouble until it’s too late.

Here are a few signs of a potential debt problem to watch out for:

More than 20% of your spending money goes towards loan and credit card payments

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Even if you haven’t prepared a formal budget, you can quickly find your disposable income by deducting your living expenses such as rent and mortgage repayments from your regular pay. If a significant percentage of this remaining cash is going straight onto the credit card to cover your previous expenses, it could be a sign of a debt problem.

Making minimum payments only

It makes sense to try and pay off your credit card debt as quickly as possible, especially if you can do so during your card’s interest-free period. However, when your finances are tight, it’s all too tempting to instead make repayments for the minimum possible amount, and keep your monthly budget more affordable in the short term.

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Unfortunately, this can risk leaving you in a position not unlike the Red Queen in Alice Through The Looking Glass:

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Because the minimum required repayment for most credit cards is typically quite low (often just 2% plus any interest owing, depending on the lender), you won’t make much of a dent in the debt you owe by sticking to the minimum repayments, which in turn means you’ll be charged more interest on the remaining balance.  

If you can only afford to make these minimum repayments, the time it’ll take to pay off even a small debt could be extended by years, and cost you much more in interest charges. If you add to what you owe by making additional credit card purchases, you could end up undoing any previous progress made towards clearing your debt, or even end up in a worse place than when you started, leaving you trapped in a cycle of debt!

It’s a similar situation for home loans and personal loans that offer the option to switch to interest-only repayments for a limited period. While this can reduce your financial pressure in the short term, you won’t be reducing the amount you owe during the interest-only period, so your loan will ultimately take longer to pay off and cost you more in total interest. And if it looks like you’ll be unable to afford the repayments when the loan’s interest-only period expires, it may be time to contact your lender.

Being declined credit

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While having your credit card declined at the supermarket obviously isn’t a great sign, that’s not what we’re referring to here. Instead, we’re talking about having your application for a new loan or credit card rejected by a lender. 

When lenders are deciding whether or not to approve your application for a loan or credit card, they not only check your credit history for defaults and bankruptcies, but also look at your existing level of debt and the number of recent credit applications you’ve made. Even if you have a clean credit history in terms of having never missed a repayment, a lender could still turn down your credit application if they feel that your existing level of debt is too great for them to responsibly lend you any more money.

Cases like this can serve as an indicator that you may be burdened with too much debt at present, and that you may want to look into your options for reducing what you owe before looking into any additional loans. 

Borrowing money to pay debts

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The traditional expression “robbing Peter to pay Paul” could be modernised into something like “maxing out my Peter Bank Credit Card to pay the interest on my Paul Financial personal loan”.

Borrowing money from one loan to pay for a second loan could potentially leave you in twice as much trouble, where you may be out of the woods in the short term, but you’ve put yourself into more debt, with more interest to pay in the longer term.

Similar principles apply when borrowing money from friends and family to pay off your debts to banks and other lenders. While loved ones may offer you their heartfelt support with the best of intentions, if you’re finding yourself relying wholly on the assistance of your social circle to keep your finances afloat, that could be a sign of a debt problem.

Note that this isn’t the same as taking out a debt consolidation loan, which is intended to replace your existing unmanageable debts by refinancing them into a single manageable personal loan, or even your mortgage, rather than offering a quick fix. Depending on your financial situation, by sticking to the repayment plan of a debt consolidation loan, you can keep your budget simple, and slowly but surely bring your finances back under control.

There’s also the option of a credit card balance transfer available, which is similar to refinancing a home loan, but for credit cards. In this arrangement, you’ll take out a new credit card from another lender, transferring the balance you currently owe onto the new card. Often, the new lender will charge no interest on the transferred balance for a limited period of time, offering you the ideal opportunity to start quickly paying off the debt! However, once this interest-free period expires, you’ll likely be charged interest at a high rate on any leftover balance. And depending on the lender, if you make any new purchases with this card, you may immediately be charged interest at the high revert rate, even during the interest-free period for the transferred balance.

Missing repayments

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It’s happened to the best of us – we’ve all copped an overdue library fine, or left a phone bill sitting unopened and forgotten on the coffee table until it’s too late. But these are (relatively) small potatoes compared to missing payments on credit cards, personal loans and mortgages, which can have an immediate and nasty effect on your credit history (though you should still pay those phone bills – they can also end up on your credit history if left unpaid!).

If you don’t have enough funds available in your account to cover your loan or credit card repayments when they fall due, rather than letting the due date pass, crossing your fingers and hoping to make up the costs next month, you should contact your lender as soon as possible and start discussing your options.

Debt collectors are chasing you

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Debt collectors aren’t the scary hired goons you see in the movies. In fact, debt collectors are obliged to treat you politely, and forbidden to harass, coerce or deceive you. And rather than appearing unexpectedly on your doorstep, debt collectors are more likely to contact you by phone to discuss your debt. They may also write you letters or reach out to you online, and only seek you out in person if they have trouble contacting you through other channels. 

If your debts have gone unpaid for long enough that your lender is chasing you up with debt collectors (whether from their own staff or from a debt collection agency), you could be in some serious financial trouble. Talk to the debt collector and/or your lender to work out your options, so you can determine the best course of action going forward.

How to get financial help:

If you’re struggling with financial hardship, you can find financial guidance and advice at the Australian Securities and Investments Commission’s (ASIC’s) MoneySmart website.

This includes access to free financial counselling and MoneySmart’s National Debt Helpline1800 007 007

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Learn more about credit cards

How to pay a credit card from another bank

Paying or transferring debt from one lender to the other is called a balance transfer. This involves transferring part or all of the debt from a credit card with one lender to a credit card with another. As part of the process, your new lender will pay out the old lender, so that you now owe the same amount of money but to a new institution.

Many credit card providers offer an interest-free period on balance transfers to help new applicants better handle their debt. During this period, cardholders are not required to pay interest on the debt they brought over from the other card. This can be a great opportunity for consumers to pay off credit card debt with no interest. There are often fees associated with balance transfers; normally, these are a percentage of the amount transferred.

So make sure you read the terms and conditions of the card before transferring any debt across.

How to get rid of credit card debt

  1. Calculate your debt. Credit card calculators make it easy to determine the repayments required to chip away at your debt in the shortest timeframe possible for your budget.
  2. Repayment plans. Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
  3. Talk to your credit provider. If you’re still struggling with your debt, give your credit provider a call. You may be able to come to a new arrangement.

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

What is a credit card?

A credit card is a payment method which lets you pay for goods and services without using your own money. It’s essentially a short-term loan which lets you borrow the bank’s money to pay for things which you can pay back – potentially with interest – at a later date. Credit cards can also be used to withdraw money from an ATM, which is known as a cash advance. Because you’re borrowing money from a bank, credit cards charge you interest on the money you use (unless you repay the entire debt during the interest-free period). When you apply for a credit card, the bank gives you a credit limit which sets the maximum amount you can borrow using your card. Credit cards are one of the most popular methods of payments and can be a convenient way of paying for goods and services in store, online and all around the globe.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

How to calculate credit card interest

Credit card interest can quickly turn a manageable balance into unmovable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.

The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.

This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

How do you pay off credit cards?

The best way to pay off a credit card bill is to set a realistic spending budget and stick to it. Each month, you’ll get a credit card statement detailing how much you owe and how long it will take to pay off the balance by making minimum repayments. If you only make the minimum repayments, it will take you years to pay off your outstanding balance and add extra costs in interest charges. To avoid any extra charges, you should pay the entire bill. 

How to get money from a credit card

You can get money from a credit card, but generally it will cost you.

Withdrawing money from a credit card is called a cash advance, as it operates more as a loan than a simple cash withdrawal. Because it is a loan, you may be charged interest on your cash advance as soon as you make the withdrawal. Interest rates are also usually much higher for cash advances than standard credit card purchases.

In addition to the interest rate, you may also be charged a cash advance fee. This could be a flat rate, or a percentage of your total cash advance. If you are considering a cash advance, make sure to add up how much it will cost you before committing.