In 2017, Australians collectively racked up $29 billion in credit card debt at Christmas, and 40 per cent of that total spend was on credit cards. The number of ‘buy now, pay later’ services are also increasing, making it harder to keep track of spend and easier to end up in a debt trap. Here’s an example of how easy it is to fall into debt and end up paying much more than you initially bargained for.
Before heading off on her family holiday over the Christmas holiday, Rachel decided to buy an expensive new camera to document her travels. The camera store offered a ‘buy now, pay later’ option, and attracted by the ‘no interest’ promise of the credit provider. Rachel signed up.
All was well to begin with. Rachel and her family had a great time on their trip – in fact, maybe a bit too much of a good time. Upon returning home she had already maxed out her regular credit card and, with insufficient savings, she was unable to maintain the required repayments on her separate camera debt. And while true to the issuer’s promise, she didn’t have to pay interest on the overdue payments, she was charged late fees on the repayments she skipped. Along with the standard payment processing and account payment fees, Rachel’s camera ended up costing a lot more than she anticipated.
The number of ‘buy now, pay later’ services is increasing. Afterpay, Certegy and zipPay are three examples. Provided that payments are made on time, this type of service can be a great way to spread the cost of purchases over several months. Just make sure that the fixed fees aren’t too big a fraction of the total loan. For example, if you buy something for $1,000, and over the life of the loan, establishment and payment processing fees total $100, you’re paying 10% more than if you had paid in full at purchase.
Seeing a good opportunity, several banks now offer repayment plans on credit card purchases. These also operate more like a loan than regular credit cards, with a fixed repayment term and regular instalment amounts. Unlike the other ‘buy now, pay later’ operators they may charge interest, although initially this is usually at a much lower rate than the standard purchase rate. However, if any payments are missed and an outstanding balance remains at the end of the fixed term, interest may be charged at the purchase rate. This is often well over 20% per annum.
Rachel now faces a double whammy of a debt trap. While she’s meeting the minimum repayments on her credit card, the outstanding balance is accruing interest at 22% pa. Plus her ‘buy now, pay later’ debt is accumulating ongoing late fees. What can she do?
One method for managing this situation could be to take out a personal loan at the lowest rate possible and use this to pay off the debts. While the camera loan may not have an interest rate as such, left too long the fixed fees can add up to a significant percentage of the outstanding loan amount. By consolidating the debts, Rachel is left with one regular payment, and with a much lower interest rate she can pay off the outstanding balance far more quickly.
But Rachel had another idea. She rolled over his credit card balance to a new card with a zero per cent interest rate on balance transfers for 12 months. This meant all her repayments went towards reducing the balance and she was also able to afford normal repayments on her camera loan. Rachel knew that if she didn’t clear the card debt during the interest-free period she would again be saddled with high interest rates, but now being more ‘debt aware’ she was able to get on top of things and was on track to be debt-free within the year.
A simple way to find yourself with more pocket money for next year’s Christmas is to put a $2 coin in a tamper-proof container every single day from today, then you would have over $700 to fund next year’s celebrations. It’s certainly not rocket science and with a tiny amount of commitment, you could start next year with a clean debt slate. Won’t that make next Christmas more enjoyable?
If you find yourself struggling with debt, call us on 1300 707 955 to have a chat with one of our qualified and experienced financial advisers to help identify the best options to get back on track and be debt-free.