Managing personal debt is crucial for maintaining a strong financial position, especially when considering significant financial decisions like purchasing a new home, investment property, or refinancing. It is important to be mindful of credit card usage and expenditure.
In Australia, there are currently 13,176,477 credit cards in circulation, with an average balance of $2,948 per card. The monthly credit card expenditure in the country amounts to a staggering $33,075,715,286, resulting in an annual interest cost of $17.7 billion for the population.
Interestingly, the number of credit cards has been declining in recent years, dropping from 16,719,055 in 2017. Many individuals now prefer cash transactions to avoid accumulating interest charges on their hard-earned money each month.
So, how can you effectively tackle credit card debt?
Break free from the burden of credit card debt
Credit cards are popular among Australians due to the flexibility and extra spending power they offer. However, the initial excitement of acquiring a credit card, with its enticing benefits like frequent flyer points or gift cards, can quickly turn into stress and anxiety.
Prioritize debt repayment
If you find yourself with one or more maxed-out credit cards accumulating seemingly endless interest, it is crucial to explore options for debt repayment or consolidation into a loan with a lower interest rate.
When addressing debt repayment, it is advisable to prioritize payments towards secured debts first. Secured debts are loans tied to your home or car. These payments are of utmost importance because failure to meet them may result in repossession, significantly hindering your progress. Nonetheless, ensure you make all minimum repayments to protect your credit rating.
Once secured debt repayments are taken care of, you can shift your focus to paying off your credit card debt or strategizing how to eliminate it entirely.
Balance transfers – a viable choice?
You may have come across lenders offering “0% transfers” for the initial 12-36 months when you transfer your credit card balance to their institution. This can be an effective method for repaying credit card debt, PROVIDED you refrain from adding more expenses to your balance.
However, exercise caution as certain lenders may charge a transfer fee based on a percentage of the balance. Additionally, their terms and conditions might require the transferred balance to be paid within a specific period; otherwise, the total interest for the entire duration may be added back to your balance.
In most cases, you will need to pay more than the minimum repayment to ensure the balance is completely repaid by the end of the interest-free period. It is essential to perform thorough calculations and avoid falling into a trap.
Preserve your credit file
While balance transfers can be a useful option, they should not be seen as a long-term solution. They are primarily intended for repaying outstanding credit card balances.
Continuously transferring credit card debt from one lender’s interest-free offer to another can potentially lead to trouble. Each credit card application contributes to your credit report and affects your credit score. This, in turn, may impact future home loan applications, as multiple inquiries reflect poorly on your creditworthiness. Exercise caution to safeguard your credit file.
Consider consolidating debt into your home loan
If you find yourself overwhelmed by credit card debt, consolidating your debts may be a suitable option. This involves refinancing your current home loan and leveraging the equity you have in your home to merge credit card balances, store cards, or personal loans into your mortgage.
By doing so, you can benefit from a single manageable monthly payment at a much lower interest rate (potentially around 4.5%*) compared to the average credit card rate of 19.94%.
Remember, it is essential to consult with a finance specialist before making any decisions or taking action. They possess the knowledge and expertise to guide you through various debt consolidation methods that may be available to you.