Starting out: Steph Nash
Millennials may be saddled with debt but there are ways to get on top of it
I’ll be honest – I hate generalisations. I don’t like reading that the majority of young people feel entitled. That our apparent excessive spending habits are why we can’t get into overly inflated housing markets. Assigning labels to people can be troublesome and is often offensive.
However, there is an element of truth to the great myth of the millennial spender. While it’s incorrect to claim that most millennials have an excessive spending problem, research shows that people in our age bracket are in more debt than gen Xers or baby boomers. But there are reasons for this.
According to research by credit bureau Experian, millennials with a mortgage, credit card or personal loan have an average debt of $428,000, which is $146,000 more than the average for gen X and baby boomers. This is explainable. If you have a debt of around $400,000 you’re likely to have a mortgage (if not, you need serious financial counselling). Gen Xers and baby boomers are most likely to have smaller debts because they’ve had more time to pay down a significant chunk of their mortgages. And in some areas house prices have risen astronomically, so new mortgages there are getting larger.
For credit cards millennials have an average debt of $12,700, which is over $4000 more than the average of a gen Xer. I have my own opinion on this (don’t even get me started on the cost of living) but the fact is that purchasing card credit is now comparatively a lot more expensive than other types of debt. While the official cash rate has plummeted over the past few years, along with rates for home loans and savings accounts, credit card interest rates have remained consistent since about 2010.
Credit card debt is a lot more common than you think, with only 40% of credit card accounts paid off each month. If you’re in trouble with your credit card, there are a few things you can do to get out of the red:
Itemise your debts. If they are spiralling out of control, the first step should be to cut back your expenses. Compile a list of all your debts and expenses and see how they compare with your income, including your salary and any income from savings accounts or investments. Look at your outstanding balance, the interest rate on your cards and your minimum monthly repayments to work out your total debt.
You should then reassess your budget and work out what changes you need to make. It might be the case that you need to find better deals for your utilities or higher interest rates for your savings or, unfortunately, cut back on splurge items.
How do you work out the order of importance in tackling your debts? List each in order of interest rate, from highest to lowest, and then by balance size if two have the same rate.
Create a cash buffer. Have a small portion of your income transferred to a savings account every payday. It’s important to have a stash of cash on hand to be able to pay at least your minimum repayments. A high-interest savings account would be perfect. If you’re not doing so already, you should definitely arrange for your credit card payments to be automatically deducted from your everyday account. Pop all your due dates into your calendar (tactile or electronic) to remind you to check that you’ve got enough in your account to make the repayment. If not, you’ll have to organise for it to be made from the emergency fund.
Switch to a low-rate credit card. It is much friendlier to your pocket than a standard rate version. Look for a card that has low fees as well as a low rate. You can easily compare $0 annual fee credit cards online using the Money magazine website (moneymag.com.au). These cards might be short on bells and whistles but if your income isn’t stable and you’re relying on the card for cash flow the low interest rate will be better for you than the rate on a standard card. You’re more likely to get a low rate outside the big four banks. In February Canstar data showed that customer-owned banks, which include building societies, credit unions and mutuals, were on average 5.7% lower than the big four.
Consolidate. If you’ve got debt on multiple cards or are looking for a way to pay down your debt faster, consider making a balance transfer to a card with a 0% purchase rate. These cards are often fixed for a number of months so that you have more time to reduce your debts. When comparing balance transfer offers, consider what the rate reverts to once the promotion period has ended, as well as the annual fee.
Don’t raise your limit. While it might be tempting to take up an offer to increase your credit limit, you may live to regret it if you can’t meet your repayments. Before you apply, consider if you really need it.
Staff writer Steph Nash has a bachelor of communications degree.
It’s important to have a stash of cash to meet minimum repayments