Avoid creeping credit card debt

Australians have $33 billion worth of credit card debt collectively and it's accruing interest at an average rate of 17%.

Credit cards can be tremendously handy but they also offer one of the most expensive forms of personal debt. And despite banks being forbidden by law since 2012 to offer unsolicited increases in credit card limits, our card debt is growing.

Australians collectively have outstanding card debt of $33 billion, which is accruing interest at a staggering average rate of 17.0%.

More worrying, the credit limit on our cards is creeping up, opening the door to even more card debt.

Comparison site Finder found Australian households have access to almost $150 billion in potential debt based on current card limits. That’s an increase of $4.6 billion in just 12 months.

To put this in perspective, the average limit per credit card is a whopping $9,069, and many of us own more than one credit card.

It begs the question, how have credit limits risen so much when financial institutions have been banned from making unsolicited offers to increase card limits since 2012?

Part of the answer is that card issuers are not prevented from offering new cards to the same customers. And according to Finder this has seen a rise in the number of people holding multiple credit cards.

As I noted earlier, used wisely, credit cards can be very useful. They provide a financial lifeline in an emergency, and these days it’s difficult to reserve a hotel room or even a table at a restaurant without providing card details.

But along with the possibility of overspending, holding multiple cards – or having an over the top card limit, brings the risk of high interest charges that drain household budgets.

Consistently carrying a card debt of $3,000 for instance, could see you pay $2,550 in interest over five years. That’s a big slug of cash.

It’s an area where an ounce of prevention is worth a tonne of cure. The simplest way to avoid or minimise card debt is by paying off the full balance each month, or at least pay more than the minimum repayment.

As you pay off your card balance, ask the lender to lower the credit limit. And resist offers to sign up for additional cards.

Switching to a cheaper card can provide valuable savings on interest, and there are credit cards available with rates below 10%. But – and it’s a big but – contact the card issuer and ask them to cancel your old card. It can be too tempting to reload the newly cleared card with fresh purchases, leaving you even deeper in debt.

For more ideas on managing credit card debt visit the government’s Money Smart website or check out my book ‘Free yourself from debt’.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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