Christmas credit card debt: How to take back control
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The party's over. You've lost your shoes, your credit card is out of control and all that's left is the post party nausea. It's time to get a grip.
Credit card debt is quite possibly the biggest debt problem we have in Australia. Christmas and its retail madness tempting the vulnerable exacerbates the problem. With more people shopping online than ever, the use of the plastic fantastic is out of control. Buy now, pay (through the nose), later.
There are more than 7,724,000 credit card holders in Australia according to Roy Morgan in 2011, with a collective outstanding balance of a whopping $38 billion. All of that borrowed moolah is accruing interest at an average interest rate of 17.14%. Keeping the maths simple, interest payments alone, before the borrowed amount is repaid, come to more than $6.5 billion per year. You're thinking those numbers make your balance look small, right? Think again.
The average credit card debt per card holder is $4,900, on which you'll pay more than $840 per year in interest. And don't forget your card fee on top.
Credit cards can be really useful, don't get me wrong here. They help with cashflow management, they're convenient, and while they can potentially expose you to a great deal more fraudulent activity than cash, they also offer protection if managed properly.
However, with interest rates still averaging 17.14% it's insane to hold a credit card debt, so below are a few ways to cut it off at the knees. Make this your highest money management priority; unless of course you have loan shark issues, then you're in all sorts of trouble. Let's not go there.
- Pay the full balance now. If you can; do. Simple.
- If you can't meet the full balance, pay as much as you can into the account whenever you can; daily, weekly, monthly. Don't ever pay only the minimum repayment, thinking "oh that'll do for this month." It won't. Keep pouring as much as you can into it at every available opportunity. It's good discipline.
- Do you have a mortgage you can draw down on to repay the balance with? I hate to write this and it's with a huge caveat, but mortgage rates are around the mid fives at the time of writing compared to a massive 17.14% credit card average. If you need say, three to six months to repay your credit card debt then do so at your mortgage rate. But I stress, if you do draw down on your mortgage to repay a credit card you MUST put a corresponding mortgage repayment plan in place. Let's say you drawdown $5000 to repay the credit card debt, put a direct debit in place that redirects your salary into your mortgage for a set period of time until your balance is evened out again.
If you can't manage any of the above, or if you've missed a payment, talk to the credit team at your credit card company as soon as possible. It might sound like sticking your head in the lion's mouth but they're usually pretty helpful if you're stuck and can demonstrate that you're trying to do the right thing. Don't be embarrassed either, you wont be the first conversation of this nature they've had today and it will be a lot more embarrassing if you do nothing, lose your credit rating and get rejected for a phone account with Telstra down the track; let alone lose a sophisticated business transaction because you come up as a bad debtor.
Be honest, tell them you're having difficulty and map out a plan with them. It's in their interests that you repay the amount eventually since a "bad and doubtful debt" is not good for business and it's a fine balance between collecting interest for as long as possible and bankrupting their clients. Ask for an interest rate reduction or freeze as part of the deal. Your side of the bargain is that you commit to a payment plan and stick with it. By doing the right thing, you will be able to protect your credit rating, your reputation and retain a good relationship with the bank.
Once you have everything back under control, take some time to ask yourself what went wrong. Are you a compulsive spender or are you just over generous in the gift department?
What can you do differently next time to avoid the same situation? You'll know; your challenge is to out the truth to yourself and change any negative behaviours. Good luck!