Credit card debt ruining Aussie retirements: how to avoid the same fate

With no job to tie you down, retirement promises more opportunities to wind down and relax, whether it’s learning new hobbies or finally taking that dream holiday overseas. But for a growing number of senior Aussies, that may no longer be possible with their credit card trapping them in debt they can’t pay off. 

Ten years ago, 19% of people who sought help from Moneycare, a financial counselling service, were aged 55 or over. However, in the last financial year, this figure rose to 26%, with nearly half of its clients calling about credit card debt. 

According to Mozo’s banking expert Peter Marshall, retirees can be vulnerable to credit card debt because they usually have less money entering their bank account every month. 

“It’s always going to be a bit of a challenge to adjust from having a full income to what is usually a reduced income on the pension, and a credit card can be a really handy way to manage your finances. But there are risks attached to not getting it paid off quickly enough,” Marshall said. 

“You can end up having to allocate more of your regular income to servicing that credit card debt and meeting the required repayments. When you’re on a limited income, that can mean having less money available for other day-to-day needs like food and shelter.” 

Or if you don’t pay off the debt, the bank could even force you into bankruptcy, he added.

RELATED ARTICLE: Two in five Aussies don't pay their credit card debt on time, says Experian

Among older Aussies who have declared bankruptcy, credit card debt affected 80% of people while more than 40% admitted they owed their bank over $20,000, according to research earlier this year from the University of Melbourne.

Meanwhile, 37% said using too much credit was their main reason for bankruptcy. 

How to prepare for retirement, credit card debt-free

So before you retire, here are four steps to take to avoid running into credit card debt trouble in those later years of your life: 

1. Have a repayment plan

It can be easy to push aside your credit card bills as they come in every month and make only the minimum repayments.

But Marshall said this won’t be enough if you’re hoping to kick off your retirement debt - and stress - free. Instead, he recommended devising a solid plan to clear all of your debt before you leave the workforce.

“Take advantage of your work income while you’re still able to work, and try to go into retirement without those debts hanging over you,” he said. 

Begin by working out exactly how much debt you have. If you have multiple credit cards to handle, prioritise them either by paying off the one with the highest interest first or paying the one with the smallest balance first. 

Setting a realistic goal can also help you think further down the track. This goal could be long term, for instance, paying off your debt before you retire in five years’ time. Or it could be short term, like making $50 more than the minimum repayment next month. 

Not convinced? Punch in the numbers on our debt repayment calculator to check how soon you’ll be able to pay off your credit card based on your current and projected monthly repayments. 

2. Consolidate your debt 

Even with a goal and a plan in place, having multiple credit cards to pay off can be overwhelming.

That’s where a debt consolidation loan can come in handy, as it combines all of your cards into one easy-to-manage debt. And since these loans often have lower interest rates than your typical credit card, you’ll also be able to save on interest costs, which could get you out of debt faster.

The other option is to opt for a low rate credit card with a balance transfer offer. This will give you breathing space to pay off your debt with 0% interest and get your balance under control. The best strategy is to aim to pay off your balance within the zero interest period, but if you still have some left over, a low rate card will minimise the damage to your budget.

3. Choose a better-value card 

If you’re using an expensive credit card that you’re struggling to pay off, it could be time to switch to a better deal with a low interest rate and no annual fees.

Take a scenario where you’re making $100 monthly repayments for a $5,000 credit card balance. Even without considering possible annual fees, a card with an average rate of 17.10%* would cost you $3,810 in interest and take 7 years and 5 months to pay off.

But a credit card with a low 8.99% rate** and no annual fee would slim down that repayment period by 2 years and 2 months and charge you $1,288 (or about three times less) in interest. 

“If you’re going to have to use a credit card, make sure that you’re not paying more than you need to for it,” Marshall said. 

4. Make a retirement budget 

Retirement doesn’t free you from expenses, so why stop budgeting? Before you settle into retired life, it’s a good idea to sit down and make a budget for yourself.

Start off by calculating how much you need to allocate for necessities, like food and electricity bills.

If you don’t own your home outright, you’ll also have to factor in any outstanding mortgage or rent payments. 

Then, it’s just a matter of figuring out how much money you’ll have left for fun. 

Still unsure? Head over to our budget calculator to check your numbers. And take a look at our low rate credit cards comparison table to find the best deal for you before retirement. 

*Average credit card interest rate in Mozo's database, as of 19 July 2019

**Lowest purchase interest rate with no annual fees in Mozo's database, as of 19 July 2019, offered to customers using the American Express Low Rate Credit Card or the Northern Ireland Credit Union Low Rate Visa Credit Card