ASIC report finds mismanaged credit cards a “debt trap” for 1 in 6 Aussies

An ASIC report which reviewed 21.4 million credit card accounts has revealed that 1 in 6 Aussies may fall into a “debt trap” when using their plastic.

The report found that as of June 2017, 18.5% of Aussies are struggling with credit card debt, with the country’s outstanding credit card debt totalling $45 billion, $31.7 billion of which was accruing interest.

“Our findings confirm the risk that credit cards can cause financial difficulty for many Australian consumers,” ASIC Deputy Chair Peter Kell said.

Independent Mozo research also recently found that one fifth of Aussie cardholders are trapped by long term credit card debt, with 1 in 10 carrying lingering debt for over a decade. And it’s not all tropical getaways and new cars - nearly 40% of cardholders built up credit card debt paying for everyday necessities, like groceries.

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One of the reasons identified by ASIC’s review for Aussies struggling with lingering debt is that people are using credit cards that don’t fit their spending needs - for example, users who tend to carry a balance using cards with high interest rates, when a low rate option would be more cost effective. ASIC estimated that these cardholders could have saved over $621 million in a year by using a low rate credit card, even while still carrying a balance.

Mozo Director Kirsty Lamont said that, “Credit card debt is a festering problem in this country with exclusive research from Mozo showing more than half of cardholders have accrued debt on their credit card at one point in their lives. This habit sees Australians blow $5.5 billion in interest charges each year - equating to $713 per cardholder.”

Lamont added that choosing a credit card that matches up with your budget and spending style is vital to making sure a piece of plastic is a help and not a hindrance.

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Balance transfer offers also came under scrutiny, with the report finding that Aussies transferred $12.4 billion in balances over the review period of five years.

And while the good news is that 53% of cardholders reduced their total debt by 10% or more using a balance transfer and 8% managed to clear their debt completely, nearly 32% actually increased their debt by more than 10%.

Part of the problem could be that 63% of cardholders who took up a balance transfer didn’t cancel their old cards and more than half used the new balance transfer card for spending soon after transferring their balance.

“Consumers who did not cancel a card, and who used both their old and new cards, were more likely to increase their total debt during the promotional period,” the report noted.

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Mozo research has found that with the average credit card debt at $4,400, a cardholder making only minimum repayments would take a whopping 16 years to completely pay off their balance, and wind up shelling out more than $7,000 in interest.

But the key to a successful balance transfer, according to Lamont, is managing your card use responsibly.

“It’s incredibly important that if you take up a balance transfer offer, you firstly have a plan to clear all your debt before the interest free period runs out, and secondly, that you commit to managing your balance better in the future, by not overspending, making repayments on time, and clearing your balance each month whenever possible,” she said.

Does your current credit card match your spending needs? Head over to our credit card comparison table to find the perfect plastic fit for you, whether that’s a low rate card, an option with no annual fee, or a rewards card with plenty of bang for your buck.