Paul Clitheroe
Paul Clitheroe

Get smart with credit cards

HIGH property prices mean most home owners have a mortgage much larger than the size of their credit card debt.

However there are good reasons why a supersized card balance can be far more cause for concern than a hefty home loan.

The key lies in the purchases that typically underpin these two sorts of debt.

Our homes are an asset that normally grows in value over time. So year by year as your home loan is whittled away, your property steadily becomes more valuable.

A typical home buyer in Sydney in 1990 for instance, could have expected to pay the city's then median home price of $175,000. Twenty-five years later in 2014, the loan is paid off and the property would be closer to Sydney's current median value of $610,000. This underlying growth is why I am comfortable with mortgage debt, provided you can handle the repayments of course.

I can't say the same for credit card debt.

You may use your card for buying groceries, petrol, holidays, dining out or entertainment. Whatever the case, it's a fair bet the value of those purchases was short-lived. Unless you pay the card off in full each month, the only thing that lingers on is the outstanding debt.

Here's the interesting part. The Australian Securities and Investments Commission (ASIC) has done some research, finding that over half a million Australians carry more than $5,000 in credit card debt - and it's not always the battlers facing this sort of card balance.

It turns out that middle income earners, managers and degree qualified people are over-represented when it comes to high card debt.

According to ASIC, only 22% of Australian adults earn more than $70,000 annually, yet these people make up 42% of those who carry credit card debt over $5,000. ASIC makes the point that smart people aren't always so smart with their money.

Regardless of your income or job, the fact is we often tend to focus our energy on a home loan. Yet if a cardholder makes only the minimum repayments on a $5,000 card debt, it could take 30 years to pay it off. That's longer than many mortgages. And for what? Some groceries or a pair of shoes you purchased several decades earlier?

That's why it's worth taking steps to trim back your card debt.

Start by shopping around to see if you could get a card with a lower rate. Card interest rates range from about 10% to more than 20%, and there's a good chance you could save with a better deal.

Next, make a commitment to paying more than the monthly minimum. Any extra payments will help to clear the balance sooner and that means saving on interest charges.

It can also help to rethink your approach to spending. Swapping a credit card for a debit card that uses your own money makes it much harder to overspend. Sure it may mean you have to delay making a few purchase but that's a small price to pay for staying out of trouble with credit card debt.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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