February 25, 2019

February 25, 2019 | Life Stories


The Christmas debt hangover

Christmas can be a great time of year. A time of eating and drinking, giving and receiving, spending time with family and friends and for some, taking a holiday. It’s also a time for spending money; the turkey, a lobster tail or two, the latest gadgets or must have toys to put under the Christmas tree. In fact, a survey by St George bank late in 2018 found the average household Christmas expenditure across food, festivities and gifts totals $1,325. It also found that many Australians intended to fund this via their credit card.

 

It seems that figure was underestimated! According to research from Finder1, the average Australian credit card holder faced $1,863 in post-Christmas debt. Based on an analysis of Reserve Bank of Australia (RBA) data, Australians borrowed nearly $30 million on credit cards in December 2018. That’s a major holiday debt hangover, especially when you consider the interest alone is expected to cost Australian cardholders a whopping $237 million. That figure is based on the expectation that 27% of cardholders will still be paying off their 2018 Christmas largesse in January 2020!

Figure one highlights the financial burden credit cards can create; ABC research showed that if a cardholder made only the minimum repayments on a $2,000 card debt, it would take 17 years to repay. Imagine how much further that would be extrapolated on a larger debt balance.  

Figure one: a $2,000 credit card debt would take 17 years to repay if you make the minimum repayments

It’s not just credit cards. For some shoppers, the allure of ‘buy now pay later’ platforms, such as Afterpay and ZipPay, have been irresistible. According to a reportreleased by the Australian Investments & Securities Commission (ASIC) in November last year, at 30 June 2018 there was more than $900 million in outstanding buy now pay later balances. More than two million Australians are actively using buy now, pay later arrangements; of these, more than 60 percent are aged 18-34.

The ramifications of credit card debt

Poor financial health, including financial stress, can impact physical and mental wellbeing. Figure two shows the effects of debt stress experienced by Americans during the global financial crisis, a time when people were losing jobs, homes and financial security. Those with high levels of debt stress experienced a number of symptoms, ranging from insomnia and migraine, through to ulcers and high blood pressure, some of which can have long-term health ramifications that may outlive the debt stress.

Figure two: Effects of debt stress

Poorly managed credit card debt can impact the cardholder’s credit rating. According to credit reporting company Equifax, there are three types of late payments than can affect the cardholder’s credit report:

1.    Payment more than 14 days past the due date – this information can stay on a credit report for up to two years.

2.    Payment more than 60 days overdue, for more than $150, is considered a default – this information can remain on a credit report for up to five years.

3.    Payment more than 60 days overdue, for $150 or more, and the credit card issuer has sent a written notice but received no response – this infringement can remain on a credit report for up to seven years.

Late payments and credit defaults both have a negative effect on a credit rating; however, defaults are potentially worse because overdue debt is not removed from credit report, even once it’s paid. A poor credit rating can add to financial stress, as it makes it difficult for short, medium or long term borrowing. It can make it difficult to get a mobile phone contract, finance a car or take out a mortgage.

Although buy now pay later arrangements are typically shorter term, it seems many people are taking on more debt than they can repay. These services receive a substantial revenue stream from missed payments. For example, Afterpay charges a $10 late fee, and if the amount remains unpaid seven days later, a further $7. Afterpay’s financial reports shows the lender makes around 25 percent of revenue from late payment fees.

Credit card or buy now pay later debt can stack up and make it hard to keep on top of other bills – utilities, rent or mortgage payments, or car expenses. Failure to make other payments can also end up on credit reports; for example, utilities that go unpaid for 60 days or more can be listed.

Strategies to unravel the debt spiral – and keep clear of it

While Christmas seems to create a universal spike in credit card debt, many people have other times debt may spike, adding to the overall credit burden. Identify those times when overspending becomes a problem and implement strategies to deal with it.

Using Christmas as an example, there’s a bit over 10 months to plan for Christmas 2019. Strategies you can employ to keep debt at bay include:

  • Open a Christmas savings account – use an online account that’s not easily accessible for withdrawals. Using your Christmas credit debt as a guide, work out how many monthly payments are required to save that amount in time to meet Christmas expenses.

             ASIC’s MoneySmart website has a savings goals calculator, which can help you set and stick to your savings goals.

  • Layby is still available at most shops. Particularly good for a larger purchases, shop in the months ahead of Christmas or birthdays and use lay-by to pay off the cost. This has the added bonus of not needing to hide a special gift!

  • Shop online to compare prices and find the best value. Always take care when shopping online and check the credentials of the site you’re using. Consider using a service such as PayPal, which provides consumer protections for online shoppers.

  • Sales seem to run throughout the year rather than seasonally – take advantage of this and shop the sales. You can generally combine a sale with layby to spread the cost and make it more manageable.

At the same time, you need to prioritise paying down the credit card debt; after all, you don’t want to be one of those still paying for 2018’s Christmas in December 2020. These simple steps can help you keep on top of your expenses and, hopefully, quickly pay off your debt.

  • Budget: the template available from ASIC MoneySmart is a useful tool to manage your expenditure. Include the necessities as well as the occasional extravagance; like dieting, living to a budget should not always be punitive.

  • Monitor: track your spending using a notebook or download an app, such as ASIC’s ‘Track my spend’, free from the App Store and Google Play.

            This easy to use app enables you to set spending limits, separate needs and wants, view your expense history and identify areas where you can save.

  • Interest free periods: a quick Google search will identify a range of card providers offering an interest free period; if you can transfer your existing balance to one with a reasonable interest free period, you can pay if off more quickly as you won’t be paying interest.

  • Make extra payments: identify savings and make extra payments on that credit card debt. Making extra payments will have you get on top of it much more quickly. While having an emergency credit card can be good, if you have more than one, consider cancelling it once paid off.

There are so many credit options available and, on the surface, credit can seem a quick and easy way to deal with expenses. However, credit options can create a significant burden which, if not managed, can have a number of negative ramifications. Plan ahead and avoid the debt hangover next Christmas. You’ll be more relaxed and 2020 will start far more positively.

 

 

1https://www.finder.com.au/australian-christmas-card-debt-2018
2https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-600-review-of-buy-now-pay-later-arrangements/

 

 

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