Spenders Stretching the Limits of Credit Cards

Although credit card debt owed by Australians is $52.7 billion with $32.6 billion accruing interest, spenders have more access to credit more than ever. At an all-time high, limits on these plastic cards rose to $149.16 billion in April 2016. This, according to data from the Reserve Bank of Australia, represents a massive $4.6 billion increase in the last 12 months.

The average limit for cardholders is close to $9100 and some are getting strapped by only making minimum payments.

This becomes problematic when the amount of minimum payments are just two percent of outstanding balances. Paying off the average $3000 of credit card debt when the interest rate is 17 percent would take seven years for a user to wipe out that debt with minimum payments.

For some time the growing limits became a concern. In the meantime spenders took advantage of the opportunity to rack up more debt. Experts are warning borrowers to control how much they spend on credit cards. Too many households following this debt trend are at risk of another financial crisis unless their spending gets under control.

One piece of advice is to ask the lender to reduce your credit limit as you pay off the card balance.

Lenders are making it easy for spenders

Reigning in spending is the only way many believe borrowers can remain in control to pay down the billions owed on credit cards. Anyone thinking of signing up for a new card should always stick with a lower limit. This can be challenging when lenders off the same limits to everyone, whether it is $2000, $5000 or $10,000.

Some people make it a habit to manage their credit card spending while others are more inclined to overuse their cards. The latter group should chop up their credit cards and trade them in for debit cards.

Another word of advice is for borrowers to only keep low limit cards to keep them from splurging. 

Considering that there were 450,000 new credit cards issued that accounted for 86 percent of increased limits this is advice worth following.

Is there a threat with too much credit card debt?

With so much financial advice on ways to limit credit card debt are Australians really paying attention? Imagine being hunted down by an invisible threat. What is required to pay attention before that threat brings you to your knees?

One could draw this conclusion about the seemingly blank stare response to the growing credit card debt even though Australia is not completely past the global financial crisis. An official report seems to suggest this is the mindset of the actual repercussions of debt.

By some accounts the debt held by Australian households before the financial crisis hit worldwide was extremely high. It was predicted that a tidal wave of defaults could occur that could potentially hurt banks and might even cause a recession.

This admission suggests that big household debt before the GFC means the amount is much greater now for households. This did not occur overnight but instead has been building for many years. Banks will not be able to handle a house price cash according to regulators.

Still this is not the type of debt people are talking about that could cause problems. What seems to capture most discussions is government debt. Using terms like “the deficit,” “budget emergency,” and “government debt” shifts the focus from this secret threat.

Those aware of the threat are tired of the discussion because by comparison private debt is much more than government debt.

There were times in history where government debt was a problem for the Australian people and even a problem in other countries. But private debt has been freely existing and destroying everything in its wake.

The first step is private debt creating bubbles. The next step is when these bubbles burst. The final step drags the entire country into the debt mess.

What’s different about our debt?

Credit cards are part of household debt but mortgages consume a large portion. The good thing about mortgage debt compared to credit card debt is there is an asset backing what is owed on the mortgage. But even a slight wobble in the housing market creates a serious problem with both debts.

You might not be moved by a slight wobble in the housing market that decreases the worth of your house compared to the amount of your mortgage. But you might have a different perspective if you have an investment property with an interest only loan. Realising your investment property is actually a dud when the mortgage is more that the house’s worth makes it easier to sell out.

Over a recent three year period interest only loans have grown by 80 percent. This is a big reason to worry about how much debt is in the housing stock.

Private debt is still not considered a bad thing. While many Australians are carrying high amounts of debt, they have also been using this time to take advantage of low interest rates. Doing this helps them get ahead of payments on housing loans.

There is nothing to worry about if all debt – housing, credit cards, and government – can be paid for without causing another financial crisis. Many experts say everything will be fine, even though that is a common way of thinking just before things go from bad to worse.

Using credit cards the right way to ease concerns about debt

There is a smart way and a wrong way to use credit cards. Making a purchase online, whether it is to book a holiday or buy a book without a credit card is nearly impossible. 

Even if you operate in the offline world, credit cards are a convenient way to buy what you want without carrying around too much cash. But there is a smart way and not so smart way to use this form of payment for goods.

This list gives you four ways.

Pay the balance in full each month

Credit card interest rates are from 17 percent to 20 percent. Some are even higher, which means you could pay much more than the original price on a purchase. High interest rates mean it could take many years before the entire balance is paid off.

Think of a credit card like it is cash and you may begin to use it smartly. To do this, you should pay off the balance each month in full. This will help you avoid exorbitant amounts of money in interest.

Too many people get trapped into paying the interest on these cards and never seem to get out of the cycle. If this is your situation, look for a low interest card and switch to using that one. Another option would be to get a personal loan with structured repayments. The personal loan repayments forces you to pay the debt in full over a set time.

Paying your credit card balance off every month also benefits you by building a solid credit history. Paying back as small amount of debt demonstrates that you can be fiscally responsible.

Of course the downside to getting another card to build a good credit history is ruining it by racking up large debt amounts. If you think this would be your behaviour, it is probably best to avoid getting a credit card. Explore other ways to build up your credit rating.

Have direct debit payments

It is easy to forget a credit card payment when you are keeping track of several bills at once. Avoid more interest charges with direct debit credit card payments. You keep an unblemished credit rating while choosing to make the minimum payment slightly more or the full balance each month by the due date.

Pay off old credit card debt

Like most Aussies, you probably already have credit card debt, which is why you are reading this article for solutions. If this is really your situation and you are paying a high interest rate, there is an alternative to consider. One alternative would be to shift debt on a high interest rate card to another with no interest. You can use the allotted timeframe to pay off the card in its entirety.

Of course, you should close the first card with the high interest rate to avoid the temptation to use it again. Otherwise, you could be setting yourself up for more financial trouble with more than one way to rack up debt. 

Look for the best credit card

The best credit card for you depends on how you plan to use it. A credit card with interest-free days is probably good for you if your plan is to pay the balance in full each month. This will prevent you from paying interest for a specific number of days after you make a purchase. For example, if the interest-free days are 55 and you make a payment before the days expire, you will not pay any interest.

However, keep in mind that interest-free credit cards often come with annual fees and higher interest rates. This create a problem if you are not paying off the balance on a monthly basis.

Above all else be brutally honest with yourself about your habits of spending and credit card usage. Use that honesty to choose the card that is right for you. Our finance directory features hundreds of credit card issuers that provide multiple offerings, chose the card that suits your current circumstances and dont be afraid to ask for customised options.