It’s well known that Australian’s are one of the largest users of credit cards, however, the impact credit cards have on the amount of debt is something that many people don’t fully comprehend.
According to data from the Reserve Bank of Australia, balances accruing interest on personal credit cards increased by $241.7 million to $19.96 billion as of November 2020. However, the debt is down from $31.6 billion three years ago, according to Canstar.
The main problem with credit card debt is that it attracts some of the highest rates of interest of any form of debt. Even in a low interest rate environment, the high interest rates attached to credit cards can quickly cause a small balance to spiral out of control. In fact, despite the Reserve Bank of Australia's official cash rate dropping to a record low of 0.1% the average credit card interest rate is still approximately 17-20%.
Across the country, there is around one credit card for every working-age person, suggesting that credit card and credit card debt are not going anywhere in the short term. At the same time, there is approximately a $1500 balance per card attracting interest, as of February 2021, which, also means there is still significant debt that needs to be paid down across the country. Despite the fact that credit cards do attract very high rates of interest, used wisely, they can be an advantage to consumers and come with a number of benefits.
Let’s get to the following commonly asked questions:
There are several advantages of using credit cards, these being convenience, the rewards programs and the potential to even boost your credit rating. If you are considering using a credit card, then here are some key benefits that you need to know.
One of the biggest advantages of using a credit card is convenience. These days credit cards are virtually universally accepted and they are particularly good for online purchases. Credit cards also tend to offer a little more security than debit cards when shopping online and this can be particularly beneficial.
Recommendation: Credit cards are also great when travelling as they work anywhere and can make it very easy when travelling overseas. Just be cautious about the fees attached to overseas transactions and also the exchange rate that you will be paying.
Perhaps the most common benefit of using a credit card is the ability to generate reward and frequent flyer points. If you get a credit card that comes with a rewards program attached to it, you will have the ability to earn points when you make purchases. Generally speaking, these points can be used for things like flights, holidays and other luxury items.
Similarly, there are also a number of credit cards that offer other freebies, such as travel insurance, flight upgrades or things like movie tickets. It is important to note that rewards programs are one of the main reasons that the average credit card debt in Australia continues to remain high. In fact, many Australian’s use credit cards simply to earn reward points.
Note: One of the main issues with this is that credit cards that have a rewards program often attract higher interest rates than other types of cards and also come with higher annual fees. So while you might be earning points with your purchases, if you don’t pay off your card regularly, you’ll likely be paying higher interest rates than you might be otherwise.
While many people assume that using a credit card is a bad thing and reflects poorly on you, the credit agencies disagree. In fact, having a credit card and using it wisely can be a great way to help boost your credit score, which means it could be easier for you to buy a home down the track.
Note: Credit agencies look at the way in which you manage debt. If you have a track record of having debt and being able to pay it back and manage it well, this reflects well on you and is something backs like to see.
Whilst there are many advantages to using a credit card, there are also several disadvantages that are important to consider, especially if you are considering getting a credit card.
More often than not, if a person is given credit, they will invariably spend up to that limit. In years gone by, it wasn’t possible to get credit to make purchases on everyday items. If you wanted something you had to save up and finally buy it when you had the money.
Credit cards have in some ways created a generation of people who buy now and pay later. While this might be convenient, it also causes overspending and with credit card interest rates so high, it can quickly put people in a tough situation.
One of the best things you can do is to maintain the minimum credit card limit you can. That way you won’t be taking on too much debt and adding to the average credit card debt in Australia. Credit card companies and banks like to continually offer customers higher limits, but if you don’t need it, don’t take them up on the offer.
While we all love to get something for nothing, the reality is that credit card reward points are not free. ME estimated that around 50% of consumers are in fact, losing money by taking up the rewards program that comes with a credit card.
We also know that these credit cards that have rewards points, come with very high interest rates — currently around 20%. There is also the lure of overspending, simply to generate more rewards, which could cause more problems for you in the long run.
Recommendation: If you’re spending far more money than you’re getting back, or if your annual credit card fees are very high, then it might be worth considering moving to a simple credit card with no rewards program. At the same time, it could also be worth dropping your credit card limit to reduce unnecessary spending.
As we’ve already seen, there is approximately $20 billion of credit card debt that is attracting interest. That means there is around $1500 average credit card debt in Australia, for every card that is issued.
Note: In many instances, this debt can increase and spiral out of control, thanks to interest rates that average around 20% per annum, plus the fees and changes. There are a number of ways that you can look to reduce your credit card debt and they all centre on what’s known as debt consolidation.
Consolidating your debt simply means taking out a new loan to pay out your current debt. Ideally, the new loan you take out, comes with a lower interest rate allowing you to get on top of your debt easier and pay it off sooner. Here are the three most common ways to consolidate debt.
A personal loan can be either unsecured or secured and is used for any number of reasons. The advantage of a personal loan is that it will likely come with an interest rate that is half that of your average credit card.
Note: You can take out a personal loan and use it to pay down your credit card debt or car loans. Then you’ll have a very clear repayment schedule that you can follow to continue to pay down your debts. A personal loan is convenient and quick and is a very effective way to help get out of credit card debt.
If you own a home or any real estate or property investment, it’s possible to either use the equity in your home to pay off your credit card debt or even roll your current debt into your home loan.
Home loans are secured debt and given how favourably most lenders view Australian real estate, they come with very attractive interest rates. In the current environment, it’s even possible to get home loan interest rates under 2%.
Note: Given that most credit card debt will see you paying interest at rates around 20%, it can be very advantageous to move your credit card debt over to your home.
Many credit card providers offer rewards programs and bonus offers for new customers when they sign up. It’s possible to transfer your balances as a lump sum, to a new credit card.
Recommendation: This would allow you to consolidate your credit card debt, by putting it all on a new card with no interest for a fixed period of time. In this way, it’ll give you a chance to pay your balance owing down and get out of debt.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.