Australia’s national credit card debt is $32 billion and rising (Reserve Bank of Australia, May 2018).
It’s understandable that people find themselves struggling to pay off their credit card balance when there are so many enticing offers out there encouraging people to have just one more card.
Many people take advantage of credit cards that offer reward points or frequent flyer miles. These types of cards can be considered a useful resource, however it’s important to realise that interest rates could be as high as 17.99% & if you don’t pay off your bill in full each month your interest charges could become expensive.
Also, we’ve all seen the frequently advertised balance transfer offers which promote 0% for six, twelve, eighteen or twenty-four months. These effectively allow you to transfer your existing credit card balance from one card to another and not pay interest for the term of the offer. Balance transfers may have their benefits however, there are also drawbacks.
As consumers continue to look for ways to make their money work best for them, here are a few things to think about:
- While you can save money on interest costs through a balance transfer, most credit cards have a minimum monthly repayment that is still required to be paid which is usually 2-3% of the outstanding credit card balance. This means that every month you’ll be required to make a payment which will impact your cash flow, particularly if you have a higher balance owing. For example – If you owe $25,000 your minimum monthly repayments would be $500 – $750 per month.
- If you are paying the minimum monthly repayment you may not have the balance outstanding fully cleared within the terms of the 0% interest balance transfer offer period. For example – If you have a 0% interest term of twenty-four months and you’re paying $750 per month then you’ll only have $18,000 paid off at the end of the twenty-four months. This is assuming also that you haven’t needed to use the credit card during that period bringing the balance back up towards its original limit.
- At the end of the balance transfer term you may find yourself looking for another balance transfer offer to do the whole process again therefore leaving you no better off than when you started. It is also important to take into consideration what impact the multiple credit inquiries may have on your credit file, especially when applying for credit in the future.
It is important to keep a long-term view and having an end in sight can help achieve this.
If you own a property and there is sufficient equity available within that property, then you could look to set up a separate home loan to cover the outstanding credit card balance.
The advantage of setting up a separate home loan is that you can specify the term of the loan rather than it being over a term of 30 years for example.
If your long-term view is that you’d like the $25,000 debt cleared in 5 years, then you’d pay approximately $460.41 per month (based on a variable interest rate of 4.00% per annum) which would result in your loan being cleared in full at the end of the 5 years.
Not only can this help with cash-flow, but it also gives you a clear end in sight and peace of mind that you can finally cut up and close the credit cards.
Contact us today for more details.
The interest rate used for the above calculation was 4.00% per annum and doesn’t factor in lender fees, terms and comparison rates.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.