Double-up: Why your credit card debt surges when it is ignored

HIGH interest rates charged by credit cards are the reason many Australians fall into a debt trap where they can never seem to get on top of their borrowings.

HOW long does it take for your credit card debt to double?

The answer may be both surprising and scary for the millions of Australians who hold a combined $31.8 billion of credit card debt that’s accruing interest.

Based on current average credit card interest rates above 19 per cent, the debt doubles in just 44 months — less than four years — according to calculations from peer-to-peer lender RateSetter.

This figure does not include repayments, which are often set at a minimum 2-3 per cent of the balance and can tip borrowers deeper into debt.

The compounding effect of high interest rates is what causes the financial pain — after 12 months a typical $4200 credit card debt grows to $5076, after two years it’s $6134, and after three years it’s $7413.

ANNOYED: Why I cut up my credit card

RateSetter CEO Daniel Foggo said credit card holders generally were paying “colossal rates of interest that are up to three times greater than low-rate personal loans”.

“Banks know the power of temptation to spend combined with a lack of repayment discipline and high interest rates will usually stop borrowers from clearing their debt,” he said.

RateSetter’s Daniel Foggo says a lack of discipline can keep credit card debt high.

Credit card interest rates have edged higher in recent years despite the Reserve Bank of Australia’s official cash rate dropping more than 5 per cent in a decade.

Mr Foggo said credit card interest rates did not track the official cash rate, with banks instead focusing on “gimmicks” such as frequent flyer points, interest-free periods and convenience.

“Banks like to make a profit so they are betting on most people failing to repay the whole balance in either the interest free purchase period or the promotional balance transfer period.”

Lodex co-CEO Michael Phillipou said credit cards were considered by lenders to be much higher risk than mortgages because their debt was not secured against an asset such as a house.

“Accordingly, lenders price the risk they take by issuing the credit to the consumer by charging a higher interest amount,” he said.

“Whereas, with a mortgage, the lender has secured the debt against the property generally, therefore if a consumer is unable to pay the lender holds a mortgage over the asset and in dire circumstances could take control of the asset.”

Mr Phillipou said there were a number of personal loan players in the Australian market offering loans below 8 per cent.

Mr Foggo said low-rate personal loans could cut off the temptation to keep spending. “A fixed monthly payment and set payment schedule makes it simple to clear debt,” he said.

@keanemoney