TIMELY WARNING: Credit cards can be convenient but they have a dark side.
TIMELY WARNING: Credit cards can be convenient but they have a dark side. Alexandra Iakovleva

Our frightening $45 billion debt trap

ONE in six consumers are battling out-of-control credit card debt, and the odds are stacked against them clearing the slate.

Credit cards can be extremely convenient but a new report by money watchdog ASIC highlights their dark side. Over half a million Australians are behind with their card payments; 930,000 have a persistent credit card debt; and 435,000 cardholders make only small payments that may barely cover interest charges.

All up, Australians owe $45 billion in credit card debt, and ASIC's report shows what a debt trap they can be.

For a starters, credit card rates remain persistently high. Just 4 per cent of cards on the market charge rates below 10 per cent. With the official cash rate sitting at 1.5 per cent, lenders are clearly making big profits on credit cards, yet they don't always point consumers in the direction of the card that's suitable for their needs. According to research group RateCity, some providers even offer credit cards to people on incomes below $15,000, which is a real worry.

Getting on top of card debt can be challenging. One in two lenders set monthly repayments at just 2% of the outstanding balance, which can drag the debt out for decades.

ASIC's announcement that lenders will be required to assess whether card applicants can afford to repay a credit limit within three years is a positive step. But it's not much help if you're facing mounting card debt today.

A balance transfer deal with a period of zero or very low interest can offer a solution but making it work calls for discipline. One in three people using a balance transfer just end up deeper in hock.

To make the most of these deals, work out how much you need to pay each month to clear the balance before the promotional period ends. Any debt remaining can attract cash advance rates of 20 per cent or more.

Resist the urge to use the new card for purchases - interest-free days don't apply when you transfer a balance. Instead, aim to wean yourself off credit cards altogether, and get into the habit of reaching for a debit card instead.

One of the catches with balance transfer deals is that you can't usually shift 100 per cent of your old debt to the new card. So you could still be left with a chunk of money owing on the old one. Budget as much as you can towards paying this balance off, then cancel the card.

If it all sounds too hard, think about using a low rate personal loan to pay off a credit card. You get the benefit of a clear debt-free date without opportunities to load up with a fresh round of purchases.

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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