New data from peer-to-peer lender, RateSetter has found that 47.8% of credit card holders agreed it’s too difficult to make more than the monthly minimum repayment on their balance.
Not only are these Aussies struggling to make the minimum repayment, they’re also unable to pay off debt during the interest-free period.
These findings support the results of a recent ASIC report, which revealed that as a nation, we currently have an outstanding credit card balance of $45 billion.
“With ASIC reporting that one in six consumers struggling with credit card debt, it is clear credit cards are no longer the smart way to navigate personal finance,” said RateSetter CEO, Daniel Foggo.
The real cost of the 'buy now, pay later' approach
According to RateSetter, Aussies who spend with a ‘buy now, pay later’ attitude can quickly land themselves in hot water.
By only making the minimum repayment on their credit card, they enter what’s called a “revolving balance” - meaning their debts grow almost as fast as they’re chipping away at the balance.
Plus with the EOFYS coming to a close, many Aussies may soon find their successful bargain hunting is actually costing them more than they realised in the long run.
“Retail sales can seem like a great time for consumers to make the purchases they’ve been considering while also saving big bucks. But with most shoppers putting their purchases on credit, in many cases the savings gained on the day will be cancelled out by the amount of interest that needs to be paid over the coming months,” says Foggo.
RateSetter calculations show that if a credit card holder makes the average minimum repayment of 2% on a $5,000 debt, they’d pay $102 per month in repayments.
However, once the average interest rate of 16.99% is combined with these minimum repayments, it would take a cardholder making the minimum monthly repayments a lengthy 29 years to pay down the debt, and the total amount paid then jumps to a massive $14,996.
A savvy solution or a bigger burden?
But rather than paying the price for their plastic, many Aussies have opted to try another method - taking out a low-rate personal loan.
In 2018, Ratesetter had the highest number of debt consolidation loan applications since the business started in 2014. In fact, within the EOFYS period last year, 20% of loans were taken out for debt consolidation.
And according to RateSetter, these borrowers were taking out loans worth an average $17,380 to repay credit card debt.
So to find out whether these Aussies were onto something, we spoke to Mozo Product Data Manager, Peter Marshall.
“I think it’s a great idea if you’re struggling to keep your hand off the credit card,” he said.
“A personal loan has set repayments, so there’s a structured plan to pay down the debt and at the moment there are some great low rate options, which means your interest bill will be a lot less. And unlike a credit card, there’s no annual fee that needs to be factored into the budget.”
However, Marshall went on to say that while debt consolidation can be a lifesaver for many, the result will depend on the person themselves.
“Whether debt consolidation will work or not depends on the person, because you will have to cut up the credit card. There’s no point in taking out a personal loan only to double your debt. Debt consolidation requires discipline and commitment,” he explained.
So if you’re thinking it’s time you blast credit card debt with a debt consolidation loan, head over to our personal loan comparison tool.