How to avoid a credit card debt disaster
Did you know that Australians owe over $50 billion (and rising) on their credit cards? Here are some tips from Consumer Action Law Centre CEO Gerard Brody on how we can stop a love of credit cards turning into a debt disaster.
Understand how your card works
I’m not saying that you should simply cut up your credit card. For many people, credit cards can be a useful way of managing household finances. But knowing more about the way your card works can help you save thousands in interest charges.
When you pick up your monthly bank statement, prominently featured will be the minimum repayment amount. This is a relatively small amount compared to the balance owed. And when assessing your capacity to pay back credit, most banks will base their decision on this minimum repayment, not the credit limit on your card. This is a significant weakness in the current laws. So don’t just rely on your bank to make the right call when applying for a new card or credit limit. Make your own assessment of what you can afford to repay every month.
It may sound obvious, but if you don’t want to be charged interest (and who does?), be sure to pay the total amount owing on your credit card rather than just the minimum repayment amount. Let’s face it, credit card interest is obscenely expensive, with annual rates typically sitting at between 12 and 20 per cent per annum. This is clearly a very profitable exercise for the banks, particularly given that the Reserve Bank cash rate is at a record low.
Don’t forget that if you withdraw money from an ATM using your credit card, you will be charged interest immediately on the amount you have withdrawn, which could give you a nasty surprise at the end of the month.
Don’t be afraid to switch
We now have more credit cards to choose from than ever before, but many of us don’t switch credit card providers. In fact, the four major banks account for around 80 per cent of total outstanding credit card balances. Don’t be taken for a ride – shop around for the best interest rate, fees and features that suit you.
For starters, benefits like “rewards points” are often outweighed by higher interest charges or annual fees. Make sure you read the fine print, as these nasties can add a lot to the cost of your card.
Also, be careful of balance transfer deals that offer you a zero interest or low introductory interest rate for a limited time. There can be fees associated with transferring balances and any new purchases you make using your new credit card during this period will incur interest immediately.
Ask for help early
If you are worrying about your debts, or you are having trouble making your minimum monthly repayments, don’t be afraid to ask for help. We recommend speaking to a financial counsellor, even if it is only a back-up plan, to ensure that you are well-informed about your options. Get help early. Leaving it too late may limit the options you have, and might mean you drag credit card debt issues into your retirement.
To find out your options, call the National Debt Helpline on 1800 007 007. Remember money problems can happen to anyone. While you may feel embarrassed about seeking help, our financial counsellors are not judgmental about your circumstances, and offer confidential, independent and free advice.
Our financial counsellors can give you advice about refinancing, early access to your superannuation, financial hardship assistance, creating budgets and negotiating with creditors.
The Consumer Action Law Centre is an independent, not-for-profit, campaign focused, casework and policy organisation.
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