How to avoid a credit card debt blowout this Christmas

Debt still controls many households at Christmas despite the dwindling popularity of credit cards. Here’s how to stop your personal debt from spiralling out of control.

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Credit card lending by banks has had its biggest fall in 14 years but Australians will still pile billions of dollars onto their plastic this festive season.

Consumers head into Christmas owing $43.3 billion on their personal credit cards, according to new Reserve Bank of Australia data.

Close to two thirds of that – $27.7 billion – is accruing interest at an average rate of 18 per cent, while a boom in lending platforms such as Afterpay and Zip Pay is creating a new breed of consumers in debt.

CommSec senior economist Ryan Felsman said new banking regulator data showed credit card lending had dropped 6.6 per cent in a year and household card debt was at its lowest level in close to a decade.

He said factors behind this fall included consumer caution amid weak wages growth, a shift to debit cards by younger generations and “disruption around buy now pay later platforms, mainly Afterpay”.

Recent Roy Morgan research found the number of Australians who used BNPL platforms had jumped from 1.38 million to 1.95 million in the year to September 30.

Mozo director Kirsty Lamont says consumers are getting smarter about credit card use.

“I think Millennials (aged 24-38) and Generation Z (aged 9-23) like the flexibility of buy now pay later rather than having the constraint of interest rate repayments and associated costs,” Mr Felsman said.

“And they enjoy the flexibility to do everything on their smartphone.

“But in some cases they’re completely unaware they may be locked into monthly charges or account-keeping fees.”

Failing to repay the debt fast also incurs extra charges.

Afterpay says its average outstanding balance is $218. For credit cards it’s $3161 – costing hundreds of dollars a year in interest if left unpaid.

And it’s double trouble if people repay their BNPL debt using their credit card.

Mozo director Kirsty Lamont said, if used effectively, BNPL services could be a good way to help spread out the cost of expensive purchases.

“The downside is it’s very easy to spend more than you want on things you don’t really need,” she said.

When credit card debt gets out of control, some consumers consolidate it into their low-interest home loan, while others take out zero interest balance transfer credit cards. Both approaches require discipline.

Ms Lamont said consumers had “wised up to the high costs of using credit cards”.

“However, there’s still a whopping amount – billions of dollars – accruing on credit,” she said.

“For many people, a credit card is their biggest debt and at the highest interest rate.”

People’s Choice Credit Union spokesman Stuart Symons suggested keeping an eye on your credit score through a free annual check with a credit bureau – either Equifax, Illion or Experian.

“Only have debt you feel comfortable with and that you know will not be a burden if an unexpected expense should arise,” he said.

“Get into the habit of paying all your bills – not just loans and credit cards – on time or pay ahead.”

@keanemoney

AVOID DESTRUCTIVE DEBT

1. Always shop with a list.

2. Set a budget before Christmas shopping so you know where you sit financially.

3. If using credit cards or buy now pay later schemes, mark future outgoing payments in a calendar so you don’t get stung by interest or late fees.

4. Shop sooner rather than later. December 24 panic purchasing will almost always cost you more.

Source: Mozo.com.au

Originally published as How to avoid a credit card debt blowout this Christmas