Don't be haunted by the financial ghosts of Christmas past

December 22, 2016

The festive season is an expensive time of year for many Australians, leaving them with a significant amount of credit card debt to pay off in the New Year.

“Australians often find themselves using their credit cards to cover the cost of gifts and various social occasions,” Mortgage Choice chief executive officer John Flavell said.

“Unfortunately, it is quite easy to lose track of your expenses and end up spending more than you can actually afford.”

According to the Australian Securities and Investment Commission, it is estimated that Australians will owe $32 billion on their credit cards – or approximately $4,300 per card holder.

“Some people may be in for a shock when they receive their credit card bill in the New Year and realise how much debt they are in,” Mr Flavell said.

“While paying down credit card debt can seem like a daunting task – especially first thing in the New Year – it doesn't have to be. There are a number of easy steps people can take to pay off their credit cards quickly and re-gain control of their financial situation.”

1.  Set a budget

According to Mr Flavell, a detailed budget can help Australians pay off their credit card quickly and easily – all without negatively impacting their regular spending and savings goals.

“If you don't have a budget, this is a great opportunity to start one. Look at your salary and your expenses, such as groceries and bills, and identify how much money you can comfortably pay off your credit card each month. A detailed budget will also help you to identify if there are any areas where you can cut back and reduce your regular expenses,” he said.  

2.  Pay more than the minimum amount

One of the best ways for people to pay off their credit card debt quickly is to make more than just the minimum repayments each month, Mr Flavell said.

“The minimum payment is usually 2% of your closing balance. This needs to be paid back by a due date to avoid a late payment fee and interest costs. However, if you only pay back the minimum each month, you will end up carrying the debt for an extended period of time,” he said.

“For example, if you owe $4,000 on your credit card and you only make the minimum repayments of $80 a month, it will take you more than 21 years to pay it off. By paying $200 a month, you'll have your credit card paid off within two years*.”

3.  Switch credit card lenders

Mr Flavell said switching to a different lender may help consumers to pay off their debt faster.

“A number of banks offer balance transfer credit cards with a 0% interest rate for a limited period of time,” Mr Flavell said.

“By switching to a different lender and taking advantage of the low or 0% interest rate, you should be able to pay off your debt in a timely manner.  Of course, if you are thinking about switching lenders, it is important to keep in mind that you may be charged a one-time balance transfer fee as well as an annual fee. Furthermore, once the promotional period ends, your interest rate will revert to the lender's standard rate.”

4.  Limit credit card usage

“If you don't want to switch lenders, but don't want to be hit with a similar level of debt next year, it may be worth speaking to your lender about reducing your current credit card limit,” Mr Flavell said.

“By reducing the overall credit card limit, you won't be able to accrue quite as much debt on your credit card, which will ensure you remain in a good financial position,” he said.

5.  Consolidate your credit card debt with your mortgage account

Finally, Mr Flavell said consumers who really struggle to pay off their credit card should speak to their local mortgage broker about debt consolidation.

“By consolidating your credit card debt into your home loan, you will effectively reduce your interest rate, which will make your regular repayments more manageable,” he said.  

“In addition, you do not have to worry about different debt obligations, as you'll only have one regular loan repayment to make. However, do not fall into the trap of being too relaxed, always put as much as you can manage towards your debts.”