Credit card debts
Personal credit cards provide a convenient and widely accepted way to pay for general and household expenses. Some of their features, however, may lead you into debt, particularly when your income is reduced and you are adjusting to changed financial circumstances.
Many people may think of getting a second credit card when they are struggling to make payments on the first. This is a serious debt trap. If you use one card to make payments on another or to keep making purchases beyond your means, your debt will spiral out of control.
You should contact your bank or financial institution to ask for assistance with managing your credit card debt. Available options include requesting a lower credit limit or cancelling the card. Ultimately, though, you need to take control of your spending and avoid using your credit card to buy goods and services that you simply cannot afford.
Please note the information on this page applies only to credit cards for personal expenses, not business or investment.
- When you can't pay off your credit card each month
- When you can’t pay your minimum monthly payment
- Flexible payment arrangements for credit cards
- Understand your rights and options
- How to avoid credit card debt
- The cost of credit card debt
- Case study
When you can't pay off your credit card each month
Credit cards allow you to spend money you don’t necessarily have, and in this way are very dangerous for people with limited income.
Credit card interest is usually the second highest rate of interest for any type of loan after payday, or short term, loans. The only way to avoid the high interest is to stop using your credit card for cash advances and to pay the whole balance within the interest-free period.
If you have a credit card and only pay the minimum monthly payment you’ll end up in debt. By paying just the minimum payment, $1000 on your credit card can become an 11 year loan, even with no extra purchases.
When you can’t pay your minimum monthly payment
A credit card calculator can help you check how long it will take you to pay off credit card debt under a number of scenarios.
By law, your credit card statement will have a warning and show you how much you’ll pay if you only make minimum repayments.
If you don’t pay the minimum monthly repayment, you’ll have to pay extra interest and usually a late payment fee as well. This will be so even if you don’t use the card for new purchases. A late payment fee may also be added for payments after the due date.
Flexible payment arrangements for credit cards
As with all credit for personal or household purposes covered under consumer credit law and the Code of Banking Practice, your bank or financial institution is required to consider requests for flexible payment arrangements if you are experiencing financial hardship.
If you can’t afford the minimum monthly payment, or you simply want to tackle your overall credit card debt, you need to contact the hardship area of your lender, explain that you’re experiencing financial hardship, and ask if they will vary the terms of your credit card contract. If you cancel your card, you can try to negotiate for no interest to be charged on the debt, or at least an interest rate much lower than your usual credit card rate.
Because of the complex nature of credit card debt and the high levels of interest and charges, you should seek help when managing your credit card debt before it becomes an ongoing problem.
Understand your rights and options
Find out more about:
- your rights for negotiating changed payment arrangements for credit card debt, including how to proceed if your lender refuses your proposal.
- the range of options available for dealing with your credit card debt.
- debt collection procedures for when you don’t pay your credit card debt.
If your credit card provider is threatening or has commenced court proceedings against you, you should seek legal advice urgently. Consumer Action Law Centre provides specialist legal advice on credit and debt matters. You should also immediately lodge a complaint with the relevant EDR scheme about any concerns you have including your financial hardship. Your credit card provider is then required to halt the court proceedings to see if the matter can be resolved by the EDR scheme.
Keep a record of all details of your contact with your lender, including the date and time of any calls, and the name of the person you spoke to.
How to avoid credit card debt
In a time of financial hardship you need to act quickly to bring your credit card spending under control and avoid extra interest and charges. You can do this if you:
- make your purchases using cash or a debit card if possible. Avoid using your credit card unless you can pay off the balance in full in the interest-free period.
- if you can, pay the whole balance on the card within the interest-free period to avoid high interest charges. Purchases with your card will end up costing a lot more if you don’t keep up with your payments.
- don’t exceed the limit unless you expect to be able to pay it off in the short-term. When your income is reduced, there is a risk you’ll exceed your credit card limit if you continue using your card. don’t get a second credit card believing that will solve your problems. Unless you can definitely pay the card off in the short-term, another card will make your debt problem worse rather than fixing it.
- avoid using your credit card for cash advances, as interest charges usually apply immediately.
- consider cancelling any direct debits you have to get more control over what you pay and when. Make sure though that you are not breaching contractual obligations. Seek legal advice from Consumer Action Law Centre if in doubt.
The cost of credit card debt
If you only pay the minimum monthly payment off your credit card balance, you may be reducing your debt by much less than you think.
The following examples are based on a scenario where:
- you have a typical credit card; and
- you don’t use the card for new purchases; and
- minimum payment is set at the lesser of 2.5% or $10; and
- interest will be charged from the date of purchase (unless you pay it off each month); and
- interest will be charged at approximately 16% per year.
How $1,000 turns into an 11 year loan
Suppose you spend $1,000, and make minimum repayments. You now have a debt on which you must pay interest. Of your first 2.5% minimum payment:
- about $13 pays interest; and
- just $12 comes off the debt.
By just paying the minimum balance, you will take more than 11 years to pay off that $1,000 debt. In that time, you will pay about $860 in interest.
How $10,000 turns into a 27-year loan
Imagine now that you spend $10,000, and make only minimum repayments. As the debt gets bigger, minimum payments do an even worse job of getting rid of your debt. Of your first 2.5% minimum payment:
- about $133 dollars pays interest; and
- just $115 comes off the debt.
Minimum repayments now take more than 27 years to pay off your debt, costing you about $11,000 in interest.
Source: MoneySmart website
Stephen was an IT professional who was retrenched at the age of 55 after working with the same company for 25 years. His wife, Marcie, had left her job in administration at a hospital four years earlier following an illness that still affected her. Stephen and Marcia’s three children all still lived at home. The eldest was at university, the middle one was working in retail at a music store, and the youngest was in Year 11 at secondary school.
Stephen and Marcia had a large mortgage. Stephen intended to get another job following a six week family break, but when they got back home, finding a new job was more challenging than Stephen anticipated. He also felt that he was being overlooked for the few positions available in favour of younger, more confident candidates.
Stephen and Marcia started to use their credit cards for most of their purchases. Their previous “good credit rating” from the past provided them with access to new lines of credit with very few questions asked. Their credit card debts and associated interest began to build up to a massive level.
Stephen knew what was happening but put off doing anything about it, hoping he’d find a new job, and could pay out the growing debts.
He contacted a financial counsellor who prepared a current financial statement that revealed that Stephen and Marcia had purchased some shares.
The financial counsellor encouraged Stephen to sell the shares and pay the proceeds off the credit card debt. He also helped him to work out a plan to reduce his credit card debt by paying the card with the highest interest rate first, and cancelling all but one credit card that was only to be used in the case of emergencies.
After several months, Stephen managed to get a job, albeit a low paid one compared to what he had been used to. The income was enough for him to cover day-to-day expenses and he worked out payment plans with his creditors.