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It’s the credit version of the Christmas hangover. Will lingering credit card debt be a reminder of your holiday season.
Many Australian families experience the post-Christmas credit card hangover.
After Christmas 2018, the value of credit card repayments reached almost $29.5 billion, according to Reserve Bank of Australia data1.
Credit and debit cards combined are the most frequently used payment method in Australia2. The total number of card payments has increased by around 11% and the total value of card payments has increased around 7% each year on average over the past decade.
Interestingly, the growth in debit cards has begun to outpace credit cards. Among demographics, such as Millennials, people are turning away from credit cards and instead opting for buy now, pay later products (footnote 3), which may also accrue debt if timely payments are not made.
This convenience of delaying payment may, however, mean a financial headache.
Ongoing credit card interest rates are quite often in the double digits, but many financial institutions offer “balance transfer” incentives. This means new customers can transfer an existing credit card debt onto a new card at potentially a 0.0% interest rate for a set period of time.
By using a 0.0% balance transfer offer – and being disciplined about paying the outstanding debt in full before the interest-free period expires – it’s possible to reduce your credit card interest costs. But, there are a few important caveats to be aware of:
Ultimately, compare the balance transfer offers that are available, but carefully consider the pros and cons before making a decision on whether to use one.
Another possible way to pay off stubborn credit card debt is to consolidate your credit cards into a low-interest personal loan. Th average interest rate for an unsecured personal loan may be cheaper than the average ongoing credit card interest rate.
Putting all your credit card debt into one personal loan may also provide greater structure and certainty in your life since you may be paying off the debt in regular monthly instalments.
Most debt repayment plans revolve around paying less interest, and with the record low Australian official cash rate, rolling your credit card debt into your mortgage – and increasing your home loan repayments proportionally - may be an option.
Incorporating your credit card debt into your home loan depends on the size of your existing mortgage and the amount of equity you have with your home.
An important point to note with this option, though, is the debt timeframe involved. Many home loans have 30-year terms, while credit card debts usually only last the length of time it takes to pay it off. Do the sums and see what’s best for your particular situation. You may find that paying off a smaller debt with a higher interest rate is in fact cheaper than adding to your mortgage and paying it off over a longer period of time.
Devise a household budget to help you pay off that debt. Write it down so that you can see where the savings will come from and have a tangible record that everyone in the household can commit to. Of course, if you need additional help with your finances, consult with a qualified financial adviser who can work with you to find a cure for your post-Christmas credit card hangover.
To find out more about managing your credit card if you are finding that financially, plastic isn’t so fantastic.
1. Reserve Bank of Australia statistical tables: Credit and Charge Card Statistics – C02. Data at January 2019
2. Mitchell, S and Hao, W, 21 March 2019, New Payments Insights from the Updated Retail Payments Statistics Collection, Reserve Bank of Australia at rba.gov.au
3. AlphaBeta, 2019, How Millennials Manage Money, Facts on the spending habits of young Australians, at www.afterpay.com/attachment/61/show
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