Cut Your Credit Card Debt

The good news is that Australians paid $19.82 billion off their credit card debt balances as of end October 2008, which was a significant 5.4% improvement on their December 2007 balances, and 9.2% better against their June 2008 debt balances.

The bad news is that despite the higher repayments, overall credit card debt levels are still rising. Interest continues to be levied on $32.47 billion in outstanding debt — a level that is 7.8% higher than December 2007's $30.04 billion, albeit 0.4% marginally lower versus June 2008's $32.59 billion.

As a result of the worldwide credit crunch, Australian cardholders are seeing personal credit being squeezed. the majority of households are feeling the pinch at the moment with many finding debt is overwhelming them with large home loan interest repayments and rising costs of foods and services.

At end-October 2008, the average outstanding balance per credit card account stood at $3,135 — which implied a 37% utilisation rate on the average $8,588 approved credit limit per account.

This utilisation rate is very high. Credit experts say that a cardholder should try never to exceed 10% of the approved credit limit on the card. In fact, the optimum card debt utilisation rate should be no higher than 7%.

It is a vivid illustration of the debt burden that is piling up. So, what steps can a cardholder take to take control of credit card debt? Here are some ideas.

1. Seek immediate help. You will always be better off to act now on your debt rather than put it off and end up with more serious financial problems in the future. If payments are becoming difficult to make, contact the card issuer's call centre team specifically tasked to handle financial hardship issues (not just the general staff). Provisions in the Uniform Consumer Credit Code impose upon lenders the obligation to have hardship programs on loans.

2. Stop incurring more debt. Counsellors are one in advising people to avoid borrowing more money. Obtaining low interest credit cards, which offer lower or even zero interest on transferred balances can also make sense. But it is extremely important to use only the low interest credit cards and destroy the old cards, to remove the temptation to use them and sink deeper into the hole.

3. Use any debt condolidation loan with caution. A debt consolidation loan, which rolls credit card debt onto the mortgage or a personal loan, can help. It converts high-interest credit card debt into lower-interest debt, which would drastically cut the amount of monthly interest.

But two considerations need special attention when arranging debt consolidation loans through the mortgage. First, the short-term credit card debt becomes long-term debt, payable over many years, which means total interest payments will be bigger; second, failure to service the mortgage may lead to foreclosure of the home. Debt consolidation loans should be managed well.

4. Arrange for refinancing. Assuming that refinancing a mortgage is possible (given the tighter lending criteria these days), refinancing can work. Some research and elbow grease will be necessary. The lowest interest rates for basic home loans can look very attractive but make sure you check the comparison rate that accounts for other ongoing fees such as account keeping fees, rates at the end of a promotional offer or exit fees for moving away from the mortgage: the amount involved could wipe out any savings that could come with refinancing.

5. Plan a realistic budget. You will need to change your spending habits to free up more money to slash your credit card debt. It will not be enough to pay only the minimum amounts on credit card balances as the debt will take decades to liquidate. The modified budget should include debt repayment in the schedule of monthly outgoings.

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