Whether or not you’re off the booze for January, or planning a Feb Fast, your financial hangover from Christmas could still be painful.
Collectively we flashed the plastic for an estimated $28bn in December alone, with those who carry over debt – the average ‘revolver’ owes circa $6000 – incurring interest at a typical 18 per cent.
It’s the big banks’ dirty little secret that, although 15 official rate cuts over the past decade have sent them tumbling to record lows, the average credit card rate has budged not a bit.
Meanwhile, a quarter of Aussies who funded the recent festivities with credit won’t clear their debt until May, says research by Finder.com.au – a Christmas Freedom Date almost halfway to next to Christmas.
And many more are resigned to paying interest for years.
But, for you, it doesn’t have to be that way. Here are the five steps to busting out of credit card debt this year, for good.
Step 1: Set up a balance transfer deal
There are dozens of credit cards that, rather than slugging you some 18 percent, will charge you zilch… for a period of up to 26 months. Examples include Bankwest’s Breeze MasterCard (a 2 percent balance transfer fee applies) and Citi’s Rewards Credit Card (1.5 percent transfer fee).
I consider these get-out-of-jail-free cards… you can get debt-free without paying another cent in interest.
Step 2: Get out the scissors
But you must cut up that new card – using only the balance transfer – as its new-spend rate will be dreadful and apply immediately so it is not for the day-to-day. Let’s face it, nothing in life is free, and this is one of the two ways they get you (stay tuned!).
Also cut up the old card if you can’t trust yourself not to run it up again. However, if you can trust yourself, consider instead cleverly deploying it for good this time around: using the bank’s money to cut your mortgage interest.
All you need to do is sit your salary on your home loan – actually, alongside it in a mortgage offset account – and live off your credit card for the month. The key is to pay it off from the offset account before the end of the, maybe, 55-day interest-free period.
Step 3: Use technology to avoid the trap
Next, put reminders everywhere about when the 0 percent balance transfer period ends. This is the other huge catch: if you still have debt then, you’ll also be slugged with a horrendous interest rate. If you don’t manage to ditch your debt in the period, you need to move to a new card. But more in a mo…
Step 4: Make it work once (or at a push, twice)
Divide your debt by the number of months and target paying this amount in every single one of them. This is your goal and your get-out-of-jail-free opportunity.
If you can’t manage this, you could do one more balance transfer at the end of this 0 percent period but don’t do any more than that; every time you apply for debt it drives down your credit score and adds to the impression that you’re a serial switcher from which a bank won’t profit!
Step 5: Put plans in place for next Christmas
For your final and hugely fruitful maths assignment, divide what you spent over the financially cruel yule last year by the number of pays until Christmas this year and in parallel save that amount… into your mortgage offset account.