Avoid holiday hangover by getting credit clever
THE holiday season is over; now to pay for it all.
Australians collectively racked up an extra $29 billion in credit card debt over the festive season and, without early action, plenty of cardholders could still be paying off Christmas 2017 in 12 months’ time.
Australian cardholders each notched up an average of $1727 each in holiday debt based on a study by comparison site Finder. Even allowing for a 55-day interest-free period, the interest cost alone from all this plastic debt could top $230 million.
The news isn’t all bad. Despite there being more credit cards on the market than ever before, the average card debt accruing interest has fallen from $2470 in 2012 to $1890 towards the end of 2017. This suggests we’re becoming better at paying off the plastic.
Even so, while four out of five credit cardholders plan to pay off their holiday-induced debt in three months or less, the remaining 19 per cent will take longer to clear the debt, and one in 20 expect to still be paying off Christmas just gone at the end of this year. Not a great start to 2018.
One way to trim the tab is with a balance transfer deal. The period of low or zero interest charges can give credit cardholders an opportunity to make headway on their outstanding card balance.
There are currently more than 100 balance transfer cards offering zero per cent transfers. The interest-free period varies, but more than half allow a whole year or more interest-free if you transfer your existing balance over.
The downside is that simply lobbing your credit card debt over to a new card, even one with a low or zero rate, doesn’t address what can be a serious overspending issue.
On top of this, if you can’t clear the debt before the zero rate period ends, the remaining balance can attract sky-high cash advance rates, which could be more than you’re paying on your current card.
That makes it critical to use a balance transfer deal to pay off as much of the debt as possible in the interest-free period. Resist the urge to reload the newly cleared old card with fresh purchases — cancelling the card is a simple way to avoid this.
An easier solution can be to pay as much as possible off your current card. Sticking to the card issuer’s minimum payments may seem easier on your budget today, but it can drag out the debt for years, even decades.
The credit card calculator on the MoneySmart website shows how much you could save on your card debt by making extra repayments. Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
“One in 20 expect to still be paying off Christmas just gone at the end of this year. Not a great start to 2018.”