Australian credit Cardholders 'still paying off debt in 2037'
Most Australians could be still paying off their credit card debt after you finish repaying their mortgage.
Despite a slowdown of credit card use, a new research shows too many Australians are holding onto their debt - pushing the average debt of the country to the tune of billions.
According to the latest Reserve Bank figures, total credit card debt is currently just over $50 billion, and has been between $48 and $50 billion for the past two years.
While this is an improvement on the past 30 years where total credit card debt increased by up to 28 percent year-on-year, balances are still growing, which indicates many Cardholders are likely to be making minimum repayments rather than paying down their debts.
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"While it’s great to see consumers are more cautious about using credit cards, there are too many Cardholders sitting on big debts and not prioritising to pay them down," says Michelle Hutchison of financial comparison website RateCity.com.au.
A RateCity survey in December showed 11 percent of respondents were making minimum repayments to pay off their debts – that’s potentially 1.7 million credit cards.
"In fact, by making the minimum monthly repayment of 2 percent on average, the average credit card balance of $3,282 would take 24 years and five months to pay off, based on the average purchase rate of 17.21 percent, according to RateCity. At this rate, you could be still paying off your credit card debt after you finish repaying your mortgage!" Hutchison says.
"The total interest charged would cost more than double the original balance, of $6,430. That could be your next car or a family holiday," says Hutchison.
Credit Cardholders should make a bigger effort to end their “debt rut” according to Mrs Hutchison.
"Credit cards can be easy for consumers to fall into a debt rut, because they are very flexible and credit is generally always available. But there are ways for Cardholders to get out of this bad debt for good.”
Top tips to escape credit card debt
According to Jim Wan of Bargaineering.com, escaping debt requires a change in behavior and adopting the following strategies:
Start Budgeting
Paying off debt is just like losing weight - it's a numbers game. Consume more calories than you expend in a day, you will accumulate fat. Spend more dollars than you earn in a day, you will accumulate debt. The ugliness of debt is that it'll keep growing even if you get your numbers in balance.
Imagine if every kilogram of fat on your body continued to grow at 19.99 percent a year... now you understand the insidious nature of debt.
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To combat this, you need to shed that debt and the only way to shed it is to spend less, putting those savings toward that debt. Conversely, you can also try to earn more and put the additional earnings toward debt. Either way, you will need to start budgeting in order to find the extra dollars. You will not succeed at killing your debt if you do not know how much extra you can afford to pay each month.
Consider Balance Transfer Offers
The best credit card balance transfer offers are for zero percent interest for around 6 months, which gives you the opportunity to pay down your debt as quickly as possible. With every cent going toward principal, rather than double digit interest rates, you have half a year to catch up. These offers may have a transfer fee, somewhere in the neighbourhood of 3 to 5 percent, but that fee is likely much lower than the interest rate you're currently paying.
Compare balance transfer card offers at Moneyhound
When researching an offer, be sure to understand the balance transfer fee, the promotional period, and the expected interest rate after the promotional period expires. The interest rate is likely going to be similar to what you're being charged now. Finally, do not use the credit card at all - the new debt will accrue interest at the non-promotional rate.
Use Your Debit Card
If you want any hope of paying down your credit card debt, you must stop accumulating credit card debt. Cut up your credit cards. When you carry a balance, you lose the month-long grace period on your purchases. Any purchase you make on a card carrying a balance accrues interest immediately. By using that card, you are simply digging yourself deeper and deeper into debt. It's like working out at the gym and cooling down with a milkshake; it just won't work.
To counter this, go strictly cash only. Everything you pay for must be with cash, or with a debit card linked to your bank account, rather than credit. You can't pay off credit card debt if you are accumulating it at the same time.
Renegotiate Terms
Call your credit card company and see if they would be willing to lower the interest rate on your credit card balance. If you've been a loyal customer with on-time payments, they may consider lowering your interest rate if you just ask politely. They know that you can always transfer the debt to a competitor so this isn't much different than calling up your cable provider and asking for a better deal.
It helps to have some balance transfer offers on hand in order to help convince the customer service representative that you might move your balance. Just knowing that different issuers have great offers out there shows that you've been doing your homework.
Consider Bankruptcy
If you have a significant amount of debt and you've tried everything else, don't be afraid of filing for bankruptcy. Bankruptcy isn't easy, it's a long arduous process in which your financial life will be put on display, and anyone who has experienced it will tell you that it's not a pleasant option.
But it is an option and one that deserve your attention, because sometimes there is no other way. If you do, you will be asked to consult with a bankruptcy specialist and you will need to go through the courts. It will trash your credit for a number of years, so don't take this decision lightly. That said, chemotherapy isn't pleasant either and sometimes that's the only way.
Credit card debt is a heavy burden on anyone's personal finances, so the sooner you can pull yourself out from under the spectre of that debt, the better.