Dealing with credit card debt
Australia’s household debt to income ratio has hit nearly 200% according to the Australian Bureau of Statistics. Credit card debt is a small proportion of this figure as its mostly attributed to mortgages for homes and investment; however, credit card debt is one of the hardest debts to overcome.
Last year Australians put a massive $24.4 billion on their credit cards, up from $21.9billion the year before. Now many people are good with their cards and pay off their bill each month, using the credit card to build points and rewards. However, a large number of people are not using credit in this way and accruing interest, in some cases at 15-20%. You wouldn’t take out a home loan with an interest rate of 20% so why do it with your credit card?
The big question for many is how can I get on top of credit card debt? As soon as you are unable to stop repaying the credit card balance off in full each month, then you need to reign in your spending. You all know my favourite saying is “spend less than you earn”. Credit cards allow us to feel like we have more to spend and this means you are starting to live beyond your means.
If you already have accrued credit card debt and are starting to wonder how you can get on top of it, you need to do three things. Firstly give yourself a pep talk. It’s going to be tough and requires a little discipline so make sure you are ready and dedicated to make a change. Second, take some time to build up a buffer account, ideally with a base of $1,000. You are not to touch this account unless of an emergency. An emergency is those type of expenses that you usually might put on your card when you get hit with an unexpected bill. It’s not a shoe sale. And third, move your balance over to an interest-free transfer card and begin repaying the debt in the interest-free period – usually 12-18 months. It’s likely you will need to increase your repayments, do not just stick with the minimum.
Now that buffer account you established is so crucial to you so that you don’t fall back into the cycle of needing to rely on your card again. Once you begin to repay the debt, your buffer account will be your fall-back position, not the credit card. Once your credit card debt has been repaid you can build your buffer account up to a level that can substitute the need for a card altogether.
For those who have very high levels of credit card debt, it may be tough getting the banks to transfer you to an interest-free deal. In many cases, they will suggest you transfer this to a personal loan. These loans generally have a lower interest rate than credit cards and will allow for extra repayments in the event you source an additional income to help get on top of the debt. Keep up the repayments and work hard and getting the loan repaid. Get good at saying no to things; it gets easier the more you do it.
As you get closer to having your debts repaid, start to focus on other financial goals you would like to consider such as saving for a holiday or starting to invest. When you learn good money habits, the sky is the limit!
This information contained in this document has been provided as general advice only. The contents of this document have been prepared without taking account of your personal objectives, financial situation or needs. You should, before making any decision regarding any information, strategies or products mentioned in this document, consult with your GPS Wealth Ltd financial adviser to consider whether it is appropriate having regard to your own objectives, financial situation and needs.