Credit Debt

What is credit?

Credit is borrowed money that allows you to buy goods or services now and pay for them later or over time. All credit involves a potential cost – be it the annual fee or the interest you might pay.

The credit card trap

The biggest trap with using credit cards is that they allow you to spend money that you don’t necessarily have. The convenience of ‘buy now pay later’ is not so convenient when you simply can’t afford to pay back your debt now or later.

If you have a $1,000 balance on your credit card, your monthly repayment will be around $25. At this rate it will take you 11 years to pay it off, if you just pay the minimum monthly payment.
On a $10,000 credit card balance, your monthly repayment will be around $288 and will take 27 years to pay off. During those 27 years, you will have paid $11,000 in interest – that’s a total repayment of more than twice your original balance.

What to do?

By simply doubling the monthly repayment amount in both the above examples (to $50 on a $1,000 and to $500 on a $10,000 debt) the entire debt would be repaid in two years and save thousands of dollars in interest repayments. Keep these figures in mind the next time you go to use your credit card.

If you can’t repay the entire balance of your card each month, pay as much as you can. Alternatively, look at a ‘balance-transfer’ credit card with another card provider as this option will mean that you pay less or even 0% interest while you concentrate on bringing down your balance.
Talk to your bank or financial institution or a BGF financial counsellor if you get into trouble paying off your credit card and see whether you can organise a payment schedule that works for you. The sooner you identify the problem and notify the institution, the sooner you may be able to get the situation under control.
Credit card consolidation is another option but will depend on a good credit history and your ability to meet the monthly payments. You will only have one monthly bill to handle. You can do this by transferring all your card balances to a balance-transfer credit card offering a zero or low interest rate for the life of the debt. Alternatively, you can apply for a personal loan at a lower rate than for credit cards or you can refinance your mortgage and use the equity in your home to consolidate the cards as this will be at the lower mortgage interest rate.
Keep in mind that if you have a savings account with the same institution as your card is with, then under the terms of your card account, monies can be transferred if you are behind in your minimum monthly payments.

A debit card is truly fantastic plastic

If you need the convenience of a credit card for phone and internet banking, EFTPOS or ATMs, or if you’re just not comfortable carrying around too much cash, then switch to a debit card.

A debit card looks and behaves just like a credit card and is issued by both Visa and MasterCard. However, a debit card accesses funds in your own linked cheque or savings account – so you are spending your own money, not accruing a balance that has to be repaid.

A debit card will allow you to take control of your spending because you can only access funds that are in your account. When you link your debit card to your own finances, choose an everyday transaction account, not your emergency fund or your savings account.

Keeping your savings and your spending money separate will help you build financial security.

Also, it’s good to get into the habit of paying your bills and buying your groceries first and then use the remaining amount as your spending money.