What’s your reaction when the credit card bills roll in? Fear? Horror? Remorse? For some of us, credit cards are just a convenience – they use them to make life easy, pay their bills off in full, and reap the rewards. For the rest of us (and it’s a large proportion), credit cards are a way to fund the gap between the lifestyle we want and the lifestyle we can afford. In other words, we love that they allow us to make purchases at will – and hate them regularly (like when the bills come in).
Kiwis owe more than $12.7 billion in personal debt, an average of $4400 for every person, not including mortgages or student loans. The majority of this is $5.2 billion in credit cards, $3.8 billion in hire purchase schemes and store cards and $3.6 billion in other types of loans*, Most of this is quietly accruing interest at extremely high rates.
So what to do about your credit card debt? Unfortunately, the figures can sometimes seem insurmountable, with no way out of the debt hole. But there’s always a way. It takes time, sacrifice- and a plan.
Start here, with our 10 step plan for getting out of credit card debt.
1. Stop spending on your credit card All efforts to pay off your card are negated if you keep topping it up each month. Put. Down. The. Credit. Card.
2. Assess your comfort level You’re making the minimum repayments, everyone else has debt – credit card debt is just something we live with, right? The question is, should you be more concerned? Fifty years ago, people didn’t buy things if they didn’t have the cash. Today, we think nothing of putting our groceries on credit – actually taking out a loan to buy food. We convince ourselves it’s okay because everyone else is doing it too. But getting too comfortable with debt can be the first step towards real financial problems. Taking a long hard look at your debt situation might give you the motivation to do something about it.
3. Work out how much credit you can afford If you’re using one credit card to make payments on another, chances are you’re in over your head. Even if that’s not you, it’s a good idea to assess your debt load. In an ideal world, it would take less than 10 per cent of your take-home monthly pay to service all your consumer debt (includes credit cards, store cards, car loans, etc). How’s it looking for you? If you’re monthly payments are eating up more than 20 per cent of your take-home pay, experts suggest it’s time to put the brakes on.
4. Beware credit creep What was your credit card limit when you took out your card? What is it now? If you think nothing of ticking the box when the bank sends you a cheery letter suggesting a “pre-approved credit limit increase”, think again. Even if you’re not receiving many now (and post-GFC, chances are you’re not), no doubt you’ve had them in the past.
Research by the Consumer Action Law Centre suggests that people agree to the increases because they think the bank wouldn’t offer it to them if the bank didn’t think they could afford it. Wrong. If you can make your minimum repayments, the bank is happy – the longer you carry a balance on your card, the more interest you pay. If your credit limit has crept up over the past few years, you may want to consider a decrease.
5. Understand that the minimum repayment is not your friend Usually between one and three per cent of your balance, your monthly minimum repayment is usually pretty manageable. You might even think that if you just keep paying it, eventually you’ll clear your debt. Did you know that if you only paid the minimum repayment on $1000 it will take you more than 11 years to get to $0 – and that assumes that you stop spending on the card!
6. Take action The trouble with credit card debt is that there is no set repayment and no set timeline for the debt to be repaid. So the onus is all on you to make it happen. First step: create a budget. The quickest way to drop your debt is to throw as much money at it as you can. Consider a second job if small spending cuts aren’t making a lot of difference, or perhaps you could join the TradeMe revolution and sell stuff you don’t need anymore online.
7. Look at your options Depending on the size of your debt, you have different options to help get on top of it. Smaller debts can usually be knocked over with some budgeting sacrifices and commitment. If you have savings, put them on your credit card. With most savings accounts earning less than 5 per cent interest and most credit cards attracting interest rates of at least at least 12 per cent, it doesn’t take a mathematician to work out that you’re not making money while you have debt.
8. Perhaps you need a new card Debts of around $3000 may be approached via a “balance transfer” offer – financial institutions will often offer low- or no-interest rates when you transfer your balance to a new card with them. This can give you some set-time breathing space to make inroads into your debt. Three words of caution: check the “revert rate” on the offer (the interest rate at which the card will be charged after the offer period is over), don’t use the card during the offer period (any payments you make will be used to offset the balance at the lower interest rate, leaving your later transactions to accrue interest at the usually-much-higher revert rate), and make sure you cut up your old card (or you may be tempted to use both).
9. Take it seriously Higher debts need a more considered approach. It may be that a personal loan – usually with lower interest rates and a set repayment plan – may work for you. Or, if you have a mortgage, you may be able to roll your debt into that. Both of these options need research.
10. Get some help Sorting out a big debt is difficult on your own. Discuss your situation with a trusted friend or family member you consider to be “good with money”, or get in touch with an independent financial advisor . Theyavailable throughout New Zealand – check out www.ifa.org.nz to find one near you.