Her Money: dealing with credit card debt

Jo Pugh from Brunswick East ran up a $20,000 in credit card debt, cut them all up last year, and is now halfway through paying them off. Photo: Simon O’DwyerJo Pugh’s spiral into credit card debt began when she was a 20-year-old student.
Nanjing Night Net

Earning only about $200 a week, and on a youth allowance, a bank approved her for a credit card with a $7000 limit.

“I guess I wanted to have the freedom to be able to spend a little bit more freely just for the sake of being social,” Jo, now 27, says.

“I maxed that out really quickly and ended up in this pattern of paying the minimum repayment every month and then feeling like that money was mine.”

Aiming to clear the debt, Jo applied for another credit card with an interest-free balance transfer, and then another.

Finally, she took out a $7000 personal loan – and despite the fact she says she wasn’t living particularly extravagantly, her total debts had mounted to about $20,000.

Credit cards are one of those areas where the figures are always mind-boggling. Telephone numbers, even of the mobile variety, do not even begin to tell the story.

Last year, Australians whacked $24.4 billion on their credit cards, up from $21.9 billion the year before. By December, total outstanding balances on credit cards stood at $52 billion, and nearly two-thirds of it, or $32 billion, was accruing interest. Comparison website finder南京夜网 estimates that the average credit card balance at the end of last year stood at just over $3000. This suggests cardholders are paying hundreds of dollars in interest a year.

A lot of people pay off their bill each month and never pay interest charges, but sadly many do not and subject themselves to astronomical rates of interest – typically anywhere between 15 per cent and 20 per cent. Indeed in some horrendous cases, mounting credit card debts end in bankruptcy. A Fairfax article a couple of weeks ago told the story of a Melbourne couple in their early 40s, whose failure to pay an $18,000 credit card debt ended in eviction from the family home.

Adele Martin of Firefly Wealth warns her clients to rein in their spending as soon as they stop paying off their credit card balance in full each month. “As soon as you can’t repay your bill each month, you are living beyond your means,” she says.

For clients who have already accumulated debt on their plastic, Martin uses her tried and trusted two-step plan. First, she gets them to build up a buffer of at least $1000. This will be used for emergencies so that those who are trying to pay off their debts don’t start adding to them when they get hit with an unexpected repair bill.

“The buffer, or emergency fund, is so that people don’t start to build up their debt again. This can easily happen if there is nothing to fall back on and it can become a vicious cycle. Psychologically it gets too difficult and people feel like giving up,” Martin says.

The second step involves transferring the balance to an interest-free card and making a plan to pay off the debt within the interest free timeframe – usually between 12 and 18 months.

The repayment plan inevitably involves taking a knife to a client’s expenses, but the Firefly adviser says it is not a difficult task. She can usually find about $3000 of annual savings in clients’ budgets by looking at items ranging from mobile telephone bills to gym memberships.

Gym memberships that are not being used are cancelled. Clients who have Foxtel are encouraged to consider streaming services such as Netflix, which can reduce their home entertainment bill from about $120 a month to about $10. Martin suggests that clients also hunt around for better deals on energy bills and mobile phone plans, particularly if they are breaching monthly caps for calls and the like.

For clients with more serious credit card balances, more drastic action is needed, as it can be hard to find a bank that will offer an interest-free period. In some cases, clients might have to look at moving in with their parents or getting a housemate. In addition, they need to look at their earnings. It might be time to ask for a pay rise or find a way of earning additional income.

But it has to be done. Credit card debt – and the stress that can come with it – can snowball if not kept in check, as the family from Melbourne discovered.

After a trip overseas last year, Jo knew things had to change, and she cut up her cards. “I don’t know why it took me so long to do that,” she says.

Back at university, and working as a waitress, she has halved her debt in a little more than a year, and hopes to be in the black within two years.

“As soon as I get paid, I’m putting money on all of them rather than waiting until due dates.”

Jo says she hasn’t made any significant lifestyle changes, apart from working more.

“I still feel pretty overwhelmed, particularly when I think about the amount of money that has essentially been blown on interest.”

The information in this article should not be taken as financial advice. Please consider your personal circumstances before making any financial decisions.

This story Administrator ready to work first appeared on Nanjing Night Net.

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