Money

Is credit card debt holding you back?

Published on June 28, 2016 2:07 pm, by

Working in finance is a funny thing.  After a while it can be more about the numbers and less about the people and the emotions.  Some days we make it sound easy.  Today I want to say that it’s not always easy.  For some people it’s actually very, very difficult. 

We know that 33% of households live pay day to pay day, 39% find money stressful even when thing are going well and 56% say they cannot save as much as they want to (Source: Feb 2013 BT Australian Financial Health Index).  In addition to that as a nation we hold more than $50 billion worth of credit card debt, $32 billion of that is charged interest every day.  More than 7 million of us are credit card account holders and on average we owe $4,300 (Source: June 2015 Roy Morgan research).

Depending on your credit cards to live is a balancing act.  Once you have reached your limit and can borrow no more the next step is payday lending.  And payday lending isn’t pretty with its exorbitant (even more than credit cards) interest rates.  It continues a downward spiral, for as you prioritise repaying this debt, your credit card debt continues to grow as interest accumulates further.

Often we talk about different debt repayment strategies.  Just do one at a time we say.  Go highest interest, that’s best for you.  Do smallest first, that will make you feel better.  Do a balance transfer and pay no interest for a while.  What we don’t consider is with all these methods the very thing that got you where you are in the first place is still accessible.  Your credit card.  You can still spend without having the funds available to pay back.

So today I want to push all those strategies aside and look at what is the best option for people who are really truly struggling to repay debt.  You may have one credit card and one loan, you may have more.  You may try to get ahead but really after you pay all your minimum payments, your rent and other fixed expenses, you don’t have much left.  So any little emergency goes back on the credit card and maxes you out again and you’re back where you started.

And let’s face it, when you feel like that, and you like to spend, the thing that gives you comfort just for a little while is more spending.  Even knowing it’s not smart, does it stop you doing it?  Nope not really.  In fact not at all.  Its about understanding the triggers, having a strategy and restricting access.  And that’s not easy either.  Does the thought of going cold turkey on your credit card put you in a sweat?  You can get the information you need, the tips and tricks to maybe just maybe help, or you could go cold turkey, take the hard road, strap yourself in, do it tough for as long as you have to and be in a very different position 12 months or 2 years from now.

Before you start a new journey, it’s important to know exactly where you are.  This may broaden or narrow your options.  The first thing I suggest you do is check your credit score.  The better your credit score, the higher your chance of accessing a different type of debt to repay your credit card.  If you have managed to maintain your minimum payments the very first option to consider is debt consolidation.

Debt Consolidation –

This is where you repay your credit cards with a loan.  It may be an unsecured personal loan, or if you are in the position of having equity in your home, it could be an additional loan secured against your home.  Mozo is a site that compares products and interest rates, and tells you the maximum loan amount for that product.

Before you start you need to gather together all your details.  The amount you need, the amounts you pay and do some calculations –

  • What amount are you repaying on your credit card/s (and other debt) each month?
  • What is the repayment amount on a loan that will repay that debt?
  • Is there a difference?
  • If there is a positive difference, open an account and put the difference in – this becomes your emergency money
  • If there is a negative difference look at your spending over the last 3 months and identify anything you can go without during the time it takes you to repay this debt

For this to work, you need to repay and close all your credit card accounts and cut up the cards.  Throw them away.  Only buy something if you have the money.

If this doesn’t work for you for any of the following reasons –

  • Credit history is bad
  • There is no way you can find the money to make up the difference in repayment
  • You really feel stuck

You need to move on to the next step and ask your bank for help.

If you are struggling to make repayments, your bank will have a team that can assist you.  Generally they will want an update on your financial situation – your income, debts, and asset and liability position.

Your bank may offer some interest rate or payment relief for a period of time to assist you to get back on your feet.  During this time you will be expected to make repayments, but these may be reduced payments.  Often where they have provided this assistance the card is held or blocked and you may or may not be able to use it again in future.

Another place to go to seek knowledge and tools is online. 

Debt Self Help Assessment tool – this is an online tool that will ask you about your financial position and start by giving you some practical things you can turn in to a plan to repay your debt.

And finally you can ask somebody you know and trust for help or find a financial counsellor.  Some community organisations and government departments are able to help you, or refer you to a free financial counsellor.

Related articles –
Is paying your debt off one card at a time the best way?
5 steps to repaying your credit card debt
Goal setting: what? why? how?

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Jen is an experienced banking professional who loves wine, coffee, finding a bargain and of course her three beautiful children. Since Jen's first budget led her to buy a home at 20, Jen has passionately helped others to make better decisions with their money.

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