Credit card debt hits lowest level since 2004

Credit card debt hits lowest level since 2004

Australians have wiped a total of $6.3 billion of debt accruing interest from their credit cards since COVID, according to new RBA figures released today.

This is the lowest level of credit card debt accruing interest since December 2004.

Australians have also been cutting up their cards in droves. The number of credit card accounts has dropped by over half a million since the end of March, and 1.4 million year-on-year, hitting the lowest level since April 2008.

Credit card statistics: change since COVID

  March

(pre COVID)

August 2020 Change since COVID-19
Number of accounts

13,641,553

13,057,684

Lowest since April 2008

-583,869

-4.3%

Balances accruing interest

$27.0 billion

$20.6 billion

Lowest since Dec 2004

- $6.3 billion

-23.5%

Source: RBA, released 7 October 2020, original data, excludes commercial cards.

Credit card statistics: monthly and year-on-year changes

  Monthly change

(July vs August 2020)

Year-on-year change

(Aug 2019 vs Aug 2020)

Number of credit card accounts

-84,801

-0.6%

-1.4 million

-10%

Total balances accruing interest

-$831 million

-3.9%

- $7.5 billion

-26.7%

Total number of transactions

-10.7 million

-4.7%

-9.5 million

-4.2%

Total value of transactions

- $817 million

-4.1%

- $3.2 billion

-14.3%

Source: RBA, released 7 October 2020, original data, excludes commercial cards.

Sally Tindall, research director at RateCity, said Australians were continuing to chip away at credit card balances in August with a $831 million drop in debt accruing interest from the previous month.

“While Australians have made yet another dent in credit card balances accruing interest, the rate at which we’re paying off this debt has started to slow from the peak in May, when a record 1.6 billion was wiped in just one month,” she said.

“The number of credit card accounts is also plummeting as many people turn their backs on credit cards for good.

“Providers know the glory days are over for credit cards. They’re frantically trying to create new options to challenge the buy now, pay later industry, but it could be too little too late.

“While we’re unlikely to see credit cards disappear altogether, they’re no longer the kingpin of credit.

“Debt accruing interest is likely to keep on falling in coming months as some families are likely to use the upcoming tax cuts to get themselves off a debt treadmill they’ve been stuck on for years.

“Using tax cuts to clear credit card debt might not be what the Treasurer had in mind, but for some families, the freedom that comes with being debt free will be worth it,” she said.

Working off your balance

If you're keen to cut up your credit card for good but your outstanding balance is getting in your way, consider if a balance transfer card may suit your financial needs.

Balance transfer credit cards may offer some much needed breathing room for those looking to pay down their debt. They typically come with zero per cent interest rate offers for a set period of time, such as 6 months to 24 months. In this time, through careful budgeting, you may be able to chip away at your debt once and for all. 

Just note that any new purchases made will immediately begin to accrue interest, so you may want to lock your new card up somewhere so you won't be tempted to use it. Further, if you're unable to pay your balance in full by the end of your zero interest period, you'll begin to accrue interest on your oustanding balance again. Ensure your budget is able to manage a full balance repayment in your balance transfer period. 

 

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Learn more about credit cards

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 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 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.

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 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.

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 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.

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.

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

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.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

Which credit card has the highest annual percentage rate?

The credit card market changes all the time, so the credit card with the highest annual percentage rate is also liable to change.

Keep in mind that credit card interest rates are expressed as a yearly rate, or annual percentage rate (APR). A low APR is generally good but also consider:

  • There can be different APR's for each feature of the card (e.g. purchases may have an APR of 14 per cent, while cash advances on same card could have an APR of 17 per cent.
  • Credit cards with a variable rate can change throughout the year, affecting your APR, so check the full details.
  • If you pay your balance in full every month, having the lowest APR is not as important as the other fees associated with the card. However, if you carry a balance from month to month, then you want the lowest APR possible.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.