Ways you can dodge a credit card debt spiral

Using plastic is fantastic for its convenience but it can also get you into trouble, writes Anthony Keane

CREDIT card use has been slowing but these little pieces of plastic remain Australia’s most widely used form of debt, and still deliver a painful financial punch.

Reserve Bank of Australia data shows there are almost 21 million credit cards in circulation nationally.

Some people use them as a tool to manage monthly cash flow, others collect reward points to fly free across Australia or globally, but many are stuck paying huge interest bills on their outstanding credit card balances.

RBA statistics show while card numbers have dropped 6 per cent in two years, Australians still collectively owe $50 billion on their credit cards, with $30.6 billion of that accruing interest.

At a typical interest rate of 20 per cent, a credit card debt left unchecked doubles in fewer than four years.

Fortunately, following some simple rules can help consumers avoid a debt spiral.

1KNOW YOUR LIMITS

Maxed-out credit cards are more common than you might think, and they’re one of the biggest money-suckers around.

A review of credit card lending released last year by the Australian Securities and Investments Commission found that close to one million consumers struggle with persistent card debt.

ASIC’s MoneySmart senior executive Laura Higgins said many people failed to understand how fast an interest bill ballooned if it was not paid off monthly.

“All of us would say, if giving advice to our younger selves, is make sure you have a credit card with a very sensible limit and intend to pay it off every month,” she said.

“Understand the costs around not paying back your credit card in full.”

Ms Higgins suggested using free tools such as MoneySmart’s credit card calculator to work out just how expensive credit card debt could be.

“You can see what difference it makes if you pay more than the minimum repayments, and see just how quickly the interest accrues.”

Someone with a $10,000 debt making only minimum repayments will end up paying $45,000 of interest on that debt over four decades, ASIC’s calculator shows.

2GRAB THE SCISSORS

If you can’t regularly repay your credit card debt within its interest-free period, seriously consider destroying the card. There are alternatives. Debit cards have been growing in popularity and use people’s own money other than credit.

Balance transfer credit cards allow people to switch their debt to a new card charging zero interest for a period, while low-rate credit cards charge around 12 per cent interest rather than the 20 per cent standard hit.

“If you switch to a low-interest card, make sure you cut up that other card,” Ms Higgins said.

ASIC’s research found 63 per cent of people don’t do this. “It’s really about being in control,” Ms Higgins said.

“Some people use credit cards effectively and manage cash flow through the month. But the reality is I’m not sure that’s how most people use their card.”

Consolidating high-interest credit card debt into a lowinterest mortgage can be a good strategy as long as you maintain repayment levels to wipe out the debt quickly.

3ASK YOURSELF ONE BIG QUESTION

Why do you have a credit card?

Consumer finance specialist Lisa Montgomery said a card should match your needs.

“If it’s to supplement your income and you have a balance at the end of the month, then choose one of the lower interest rate cards with low fees,” Ms Montgomery said.

“If you are points driven, you have got to look for a card that’s going to match the benefit categories that you want to take advantage of, and match your spending habits with that program.

“Regularly check to see if your interest rate is still competitive.”

4READ THE FINE PRINT

“Understand what conditions apply on the card,” Ms Montgomery said. Fees and charges are just the start. Also know the interest rate, how many days you have interest free, and conditions for balance transfer cards and other products.

“The last thing you want is a surprise,” Ms Montgomery said.

She said nobody wanted to be beating themselves up about a lingering card debt.

“Be confident in how long it’s going to take to pay that back, and the amount of interest you are paying over time.”

PLAY WITH POINTS WISELY

Credit card reward programs are not worth the effort if you are paying interest on the card each month.

People’s Choice Credit Union spokesman Stuart Symons said such cards often came with higher annual fees and interest rates.

“The industry has seen a steady devaluation in point offerings, and we can’t see that trend disappearing any time soon,” he said.

“Primarily look to how you use your credit card as a method of financing your needs – not as a secret key to unlock more consumer dreams.”

However, savvy point collectors can still enjoy benefits. Free flights usually offer the best rewards, while some cards offset their annual fees with travel credits or other bonuses.

6Mr Symons said credit cards could be a fraud risk.

“The best thing to do is to keep a regular eye on the transactions passing through your account using your banking app,” he said.

“Also look at each monthly statement and check off your receipts. This has an added bonus – you will be more aware of what you are spending, where and when.”

7SECURITY CHECK AVOID CASH ADVANCES

Withdrawing money from credit card accounts at ATMs, buying travellers cheques and gambling transactions are all examples of cash advances. “Many cash advances charge interest from the day of withdrawal, so you don’t gain the advantage of the interest-free period,” Mr Symons said. Cash advances often come with extra fees and higher interest rates. “If you can’t afford something right there and then, first ask whether you can afford it,” Mr Symons said.