Ready, Debt, Go!
Sydney Morning Herald
Wednesday September 19, 2001
The strategy:
To get on top of my credit card debt.
How do I do that?
With most people, problems with credit card debt have built up gradually. It's not a single spending splurge, but buying a bit more than you can afford over a sustained period of time.
Unfortunately, unless great Aunt Bertha has died and left you a windfall, getting back on top will be a gradual process.
The first step, says Narelle Brown, the co-ordinator of Ryde-Eastwood Financial Counselling Service, is to take a good look at your credit card statements. She says many people spend more than they realise on things such as entertainment or gambling, or use their card for cash advances on a night out. Being aware of the things that get you into trouble can help you to take steps to guard against them. You might, for example, leave your cards at home and just take cash if you're prone to spending more than you intended. You also need to understand just what your card is costing. Is that latest bargain really a bargain when you're going to be paying high levels of interest for months, or maybe even years? Even if you pay off that $100 dress in a year, we're still talking a total cost closer to $120.
While credit card issuers are heavy promoters of reward schemes, it's important to realise that cards with these schemes tend to have higher fees and interest rates. That's fine if you're paying your bill in full each month, but if you're carrying debt, those freebies can end up being very expensive. Brown says the money you save by switching to a card with a lower interest rate can help you to pay off your debts more quickly. She says anyone having problems with their cards should also try to avoid cash advances as these keep costing you until you've paid your balance off in full.
But even when I stop spending on my card, I can't seem to catch up.
If you want to pay off your credit card debts, you'll need to pay more than the minimum monthly payment. Brown reckons these minimums can be so misleading that credit cards should be forced to carry a health warning telling you it takes about 31/2 years to pay off your debt if you only make the minimum monthly payment.
If you've got more than one or two cards (and Brown says people with problems often have five or six), it's also important to avoid the trap of getting a cash advance on one to make a payment on the others, or accepting offers of new cards or increased limits to ease the financial pressures.
It might be worth swapping all your cards for one card with a low interest rate, if that's possible. That way you know exactly what your debt is (that's difficult when you have several cards), and you can get serious about debt reduction.
Brown says some people also find it useful to take out a personal loan to consolidate their debts, though this only works if you change the habits that got you into trouble in the first place.
The same goes for those offers to consolidate your credit card debts into your home loan. If you stop over-using your credit cards or cut them up you're paying a lower interest rate on your debt and can pay it off faster.
But unless you make a commitment to pay the debt off quickly, it could end up costing you a lot more. This is because you could, theoretically, take as long as 25 years to get rid of the debts you ran up on your plastic by merely wrapping them up in your mortgage.
How do I know when I need help?
Brown says if you're worried about your debts, it's better to see a financial counsellor early. That's the time they're best able to help. She says you also need to take basic precautions with your card such as checking your statements, keeping your PIN secure, and treating with caution joint card applications as you may end up being held responsible for someone else's problem spending. If you have an addictive problem such as gambling she says it's also important to seek help as soon as possible.
© 2001 Sydney Morning Herald
Share This