Paul Clitheroe
Paul Clitheroe

Put a cap on credit card debt

IT looks like the sun could be setting on our love affair with credit cards.

The nation's level of outstanding card debt has barely risen over the past year as Australians make a return to using their own money rather than relying on high interest debt.

Not so long ago our collective credit card debt was growing by around 20% annually. Put simply it meant someone starting out the year with a card balance of $5,000 could expect to rack up a tab of $6,000 by year's end. According to comparison site RateCity, these days that same $5,000 balance would be more likely to grow by just $6 over the course of a year.

The slowdown in credit card debt reflects a growing trend to make purchases using our own funds, and this has seen ongoing growth in the use of debit cards.

This is all good news, however the fact is that our national card debt is substantial - close to $37 billion in total. Reserve Bank of Australia figures show the average balance per card is around $3,300 and plenty of people own more than one credit card.

Part of the problem here is that credit card interest rates remain stubbornly high. The average card rate is around 17% but many charge 20% or more. Monthly interest charges continue to eat away at household budgets making it hard to get ahead with card debt.

To see how this works let's say that on a card balance of $2,000 you're paying interest of 20% annually. That works out to a monthly charge of about $33. If the minimum repayments are set at 2% of the card balance, you may only be asked to repay $40 each month, which means the debt is being reduced by only $7 a month.

The simplest way to make a significant impact on card debt - and save on interest charges is by making extra repayments. That said, I know it's not always easy if the budget is tight, and the temptation exists to reload the card with fresh purchases.

If you're serious about clearing card debt, one solution is to use a personal loan to pay off the balance. This will almost certainly increase your monthly repayments but the debt will be paid off in three to five years depending on the loan term. You're also likely to save on total interest costs as personal loan rates currently average around 14% - 3% below average credit card rates.

There are some handy online calculators on the government's MoneySmart website ( that can help you compare the cost of using a personal loan against the long term cost of sticking with the minimum repayments on your credit card. Check out financial comparison websites like InfoChoice or Mozo for the some of the best deals on personal loans.

And for more ideas on how to clear credit card debt take a look at my book 'Making Money'.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit for more information.

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