Did you know that there are 13M credit cards issued in Australia, with the average credit card balance being $3,000?
Apparently, we spend $33Bn on credit cards in Australia, costing $17Bn in interest per year. Crap – that’s a lot.
I am not a great fan of credit cards. I am not a great fan of points either but I am a hypocrite because we have a credit card that has accumulated about 900,000 points.
I recently calculated that to get two return tickets to London and back on points would require me to spend about $450,000 on my credit card. Some will even pay surcharges to get points. Don’t. There is a reason points are being given to you and it has nothing to do with your financial well-being.
A few years ago, I ditched most of my personal credit cards for debit cards and to be honest I am glad I did because I saved a fair bit in charges and never pay any interest. I don’t get any surprises either.
I have kept the business credit cards (more about convenience) and my trusted PA has access to one to buy various things my wife orders. But apart from that everything personal is on a debit card.
What I do know from dealing with thousands of clients is that when you fall behind in the payment of a credit card it becomes very hard to play catch up and get back on track.
And it is not only I that says so. Just look at your credit card statement. It tells you too. If you pay the minimum amount for a credit card balance of $4,500 it will take you a whopping 22 years to pay off the debt and you will pay close to $10K more than double the original amount. And it will get worse as interest rates rise with most credit card companies charging in excess of 20%.
So, if you happen to be one of the many who has credit card debt how do you smash the balance?
Pay The Important Debt First
If there is insufficient cash to pay all debts it can become challenging. What most people do is to try to keep everyone happy so pay a small amount to all the credit card companies or miss a payment on say personal loans or mortgage payments.
Generally, I say pay your mortgage, car loans and personal loans as expected by the lender and do not fall behind in that.
Then start paying of the credit card debt.
Normally there is one credit card being used. Then it gets maxed out so another is applied, which then gets maxed out and the cycle repeats until a clever AI system works out the person is too risky for another card and refuses a new application.
By this time the debt is overwhelming.
This is then the time to work out if it is better to consolidate those credit cards into one loan at a lower interest rate.
This could mean personal loans which are easier to apply for but have lower interest rates or increasing your mortgage.
It may also be worth considering using your home loan to repay credit card debt.
Small Balances Go First
With multiple cards, the chances are there will be some cards with small balances – try to kill them first even if the interest rate is competitive.
Because they will not take much time to pay off and it gives you some wins. You feel confident knowing that if you can pay the one-off in full you will be able to manage the remaining cards you have left.
Consider Balance Transfers
If your credit score is reasonably healthy you may be able to apply for a balance transfer credit card.
If you can then do so. Transfer the amount, cut up the credit card, and throw it away. Remember the idea is to pay off your debt not increase it.
But there are a couple of things you need to know. Some credit card companies will charge a balance transfer fee and some although advertised as 36 months interest-free expect you to repay the balance in less time.
Finally, the key is to have a plan. Ignoring it will not solve the problem.