Mr Whippy and Five Credit Card Busting Tips

I heard a Mr Whippy van coming up the street the other day and it brought back memories of those Sunday afternoons and also those days when there were no credit cards or you had to jump through many hoops to get one and purchases were only made with cold hard cash. You knew the value of money because you held it in your hand and it was a visual reminder of what you could or could not afford. People saved for the big ticket items like furniture, travel and kid’s education.

Compare that with the kind of society we live in today; the power of social media, instant gratification, interest free periods (you can have it now and not pay anything for 5 years), the more you spend the more you save, the McMansions and the need or want to immediately fill them with the very best of furniture and “things” to show how successful we are. What has that led to? Amongst other things is a love affair with the credit card, with the following statistics clearly illustrating that very point:

$51 billion = Australian Households credit card debt
$33.4 billion = amount of that debt that is accruing interest
19.75% = average standard credit card rate
15.5 million = credit card accounts

There are a lot of people with multiple credit cards whose balances continue to grow with no end or relief in sight. There are however some ways to combat the ever increasing balances and to bust that debt and here are my top 5 tips.

1. Make extra repayments

The best way to illustrate this is to show the difference extra payments can make. If you have a $4,500 credit card debt with an interest rate of 19.74% and you pay the minimum payment, it will take a whopping 39 years to pay off that debt. Compare that with paying the current minimum of $90 a week plus an extra $5 a week, all as a fixed monthly payment, and you will pay off the debt in 6 years and save almost $13,000 in interest.

2. Find Extra Cash

The best way to do this is to do a budget. List your income and then your expenses and see what you have left. There are websites that you can go to that provide budget spreadsheets like ASIC money smart at www.money smart.gov.au. If there is spare money, pay this off your credit card. Always start with the credit card with the highest interest rate and pay that off before moving on to the one with the next highest interest rate.

If on the other hand you are spending more than you are bringing in, then there is every chance your credit card debt is also rising. Look at what you are spending your money on and see if you can cut down on some of the discretionary items like take-away, brought lunches, take away coffee, eating out or alcohol. Or alternatively you may be able to increase your income by renting out a room in your home or asking for a raise. Anything above where you break even, pay off your credit card. Not only will you be paying off your credit card debt a lot quicker, you will also be reducing the amount you continue to charge to your credit card

3. Minimise Interest Rates

This can be achieved through balance transfers where you transfer the balance of your credit card to a lower or zero interest rate through another credit card provider. There are websites that you can go to which compare the different offerings in this space like www.canstar.com.au or www.infochoice.com.au These sites will provide information on the interest rate that is applicable, the period that this interest rate will be applicable for, any fees that apply to the transfer of the balance and annual fees that apply to the card.

Of course there are some things to be aware of in relation to balance transfers and a couple of these are:

If you continue to use the new card, any repayments that you make will be offset against the newer purchases, which attract a higher interest, rather than the amount transferred; and
If you don’t pay off the amount transferred in the lower interest rate period, then the interest rate reverts to a much higher interest rate. This means, in most cases, a greater interest rate than you were paying previously.

So it is better that you:

Cut the new card up when you receive it so you don’t put any more charges on it;
Treat the amount transferred as a low or zero interest personal loan; and
Make sure you pay of the transferred amount in interest free period.

4. Consolidate your debt

You may have multiple credit cards and may want to consider converting these to a personal loan which will be at a lower interest rate than credit card rates.

5. Equity in Your Home

If you have equity in your home you could use this to pay off your credit card debt, which again will transfer your debt to a much lower interest rate scenario. It is important that you treat it like a loan and make sure you pay back the amount owing back into your mortgage.

The above tips will of course help with your existing debt and it is important to minimise or avoid using any credit cards in the future so as to avoid the circle of debt. This requires a change of mind set and spending habits which I know is easier said than done but budgeting is a great place to start.

Bring back Mr Whippy!

Audrey Dawson is Director of Change My Fortunes