Credit card debt

Credit card debt is one of the most common forms of debt in Australia. Every person who has sought assistance from Way Forward has some level of credit card debt across multiple lenders.

Here, we explain how credit card debt works and what you can do to manage your credit card debts.

Australians and credit cards

Nearly half of all adult Australians are in credit card debt. In May 2021, there were around 13.3 million credit cards nationally, and approximately 40 per cent of Australian adults had at least one credit card.

The interest rates on credit cards across different banks also vary significantly. Some cards charge interest rates higher than 22 percent, some as low as five percent. Some banks like CommBank now offer interest free cards, which demonstrates lenders are beginning to acknowledge the pitfalls of paying interest on unsecured loans and the frequency people use them.

The amount of debt people owe on their credit cards varies greatly as do the reasons why people borrow money.

What’s the average credit card debt?

In 2019, the average Australian credit card debt was estimated at A$3258 per card.

Since the COVID-19 pandemic began in 2020, Australians collectively paid off A$4.2 billion dollars of the national credit card debt.

At Way Forward as of July 2021, across our 559 clients the average credit card debt is A$37,429 spread across almost four different credit cards per client. The highest credit card debt for one person is over A$252,000. While balances overall are reducing, some people are constantly at the limit of their credit cards.

how much interest will I pay graphic

What is credit card debt and how much does it cost?

Sometimes people apply for a credit card to make everyday purchases on essential items like food and transport, others use them for non-essential items, like luxury goods.

There are multiple ways that interest rates are charged depending on the type of credit cards. Here are some of the options:

Balance transfer

In these instances, you agree to move your credit card to another organisation and transfer the outstanding balance. This can mean you receive a reduced or even 0 percent interest rate applied to the balance you transfer over, which can sound too good to be true, and there is a catch. If you don’t pay of the balance in full by the% interest rate period, interest starts to accrue at the cash advance rate, which is usually slightly higher than the standard balance rate.

Cash advance rate

If a credit card is used to withdraw cash you immediately start accruing interest at the cash advance rate.

Purchase rate

Certain credit cards start charging interest from the moment a purchase is made. The rate charged is usually less than the cash advance rate, but is still typically quite high compared to other forms of credit such as mortgages.

Interest free period

This type of card allows you to make purchases with interest only accrued after a set number of days once the statement is issued. This might be, for example, 55 days interest free, which effectively gives you a month to pay the purchase off after the payment due date on your credit card statement.

Annual fees

Whilst this type of card may not charge interest, it will have an annual fee for the privilege of holding it or for being linked with a loyalty scheme like Qantas or Virgin.

How much interest will I pay?

It is important to consider how much interest you will pay on a card and how long it might take to pay it off.

According to the website for one major bank, looking at a balance of a little over $4,000 and making the minimum required repayment of $85 per month, it will take 30 years and four months to repay. On top of the $4,000 purchase, you pay an additional $11,000 in interest, which is a large number and a long time.

Let’s use an example to explain what the above might mean for the average Australian using a credit card to make a big purchase.

Ollie is keen to replace his old TV with a brand-new one and chooses to sign up for a new credit card to pay for the $4,000 addition to his living room. As Ollie’s savings have taken a hit in the past year, he opts for the minimum repayment at a manageable $85 per month.

While Ollie considers this a practical way to enjoy his new TV, it will take him 30 years and four months to repay the debt to his bank – during these years, he will end up paying an extra $11,000 in interest.

It’s unlikely that 30 years down the track Ollie will remember what he even bought with that $4,000. If he did, he might wonder, did he get 30 years of use for that TV, because he was happy to pay it off over 30 years?

how much interest will I pay

Many of Way Forward’s clients have credit cards to fund unexpected life changes like an excess on private health bill, or in response to losing work and needing to fund their livelihood. We have found that, for many people in a difficult financial situation, they borrow money using credit cards because they need it.

However, what can be perceived as a short-term solution to an urgent problem if repaid quickly, can become a long-term burden. We suggest using Way Forward’s Debt Repayment Calculator to see how your repayments change by paying off your debts faster.

Can I get help with credit card debt?

If you are struggling to meet your credit card repayments, we suggest getting immediate help, as a small problem can easily turn into a bigger one.

You could try speaking with your bank to see if they can do anything to assist by possibly putting a repayment agreement in place or go to a financial counsellor for independent advice. You can find your nearest service by calling the National Debt Helpline.

Credit card debt consolidation

It is possible to consolidate your credit card debts, but it is important understand the risks and benefits of consolidating any of your debts. Consolidating your credit card debt means rolling all your debts into one, under one card, with one regular repayment. It is important to understand that this will not reduce your debts or reduce your repayments. You still need to repay all the debts you owe.

You can find more information about debt consolidation on our page on this topic.

How do I pay off my credit card debt?

The most effective way to reduce your credit card debt is to contact the bank and request the card can no longer be used. If possible, stop using the card and make higher repayments than the minimum to pay off the card faster, which will reduce the overall interest on the life of the debt.

 We recommend using a budget and you can check out our blog on managing your finances better. You can also complete our online enquiry form to see if we can help you get back on track.

What happens if you don’t pay credit card debt in Australia?

If you cannot repay your credit card debts, please contact a financial counsellor immediately for assistance. If you do not pay off your credit card debt, it will inevitably impact your credit rating. Failing to repay the debt means people will continue to call and try to recover the money spent. These calls are persistent and can add to a feeling of being overwhelmed. Unless you are able to work out a plan, it can really impact your mental and emotional wellbeing. There is no reason to continue to live with financial stress, so seek help and seek help early.

How does credit card debt affect my credit score?

Credit scores are calculated by different credit scoring agencies in different ways. There are many factors to consider in understanding what impacts your credit score. For more information about credit scoring, we have published a detailed three-part series on our website:

Part 1: Understanding your credit report and your credit score – the basics

Part 2: What can you do if you believe something is wrong on your credit report?

Part 3: The impact of financial hardship on your credit report

Importantly, when determining your credit score, credit agencies will always calculate this based on the maximum limit on that card. If are you making your repayments and not maxing the credit card to its limit, this is unlikely to harm your credit score. However, if you’re meeting your repayments and you’re at the maximum borrowing this is likely to harm your score.

The maximum limit on a credit card is also considered when you are applying for a secured loan.

Can I transfer credit card debt?

A credit card balance transfer is when you move the balance of what you owe to another credit card. Typically, the interest rate on the new card is a lower rate for a specified period of time. If you have not repaid the balance transferred within that time then the whole balance will start being charged interest at their current rate which can be significantly higher.

TIP: Ensure you close any of the old cards you no longer intend to use so you’re not tempted to reuse them.

So what’s the benefit? Well, if you pay off the balance transfer within reduced rate period, typically between six months and two years, you’ve saved yourself from paying more interest than if you did nothing so it could be beneficial. If you haven’t paid off the balance, you could have an increase in the interest rate to an amount that is potentially higher than your original rate. If you have been unable to meet your credit card repayments previously, this might not be the best option.

Each new credit card or balance transfer is added to your credit report. If you apply several times in a short period of time, this may be detrimental to your credit score.

How can I get help with credit card debt?

If you can afford to continue to make repayments but are struggling to get on top of your debts, you can contact your bank/s to explain your situation and request to put a repayment agreement in place. Your bank may also put you in touch with their hardship team if you are struggling to repay your credit card debt.

There is helpful information on the National Debt Helpline website about how to negotiate a repayment plan with your lenders.

Being up-front about your situation, offering a reasonable repayment plan and maintaining your agreed terms are ways to ensure the arrangement can stay in place. As soon as anything changes, ensure to contact your lenders.

Golden rules of credit cards

  1. Big limits equal big trouble. Don’t be enticed by the appeal of tens of thousands of dollars on hand.
  2. Spend less than you earn. The arithmetic is clear. If you’re spending more than you’re earning the money will not simply materialise and you will have to find a way pay it back.
  3. Only spend what you can repay each month. Set a budget and stick to it. If you’re not earning enough to clear the balance each month you need to either earn more money or spend less money.
  4. Interest adds up. Remember unless you clear the balance in full that ‘must-have’ purchase might take a lot longer than planned to repay. Just make sure if it’s something you’ll be happy to still be paying for in years to come. For example, buying an iPad might seem a great idea, but if you’re still paying it off five years later and had to buy an upgrade in the meantime are you still happy with that purchase? You will likely have ended up paying interest equal to your purchase price.

For people struggling, a credit card can seem like a lifeline when you are wondering how you’re going to pay for essentials. But unless you get help early, the accumulated balance will hurt when it’s time to pay it back.

If you’re stuck, get help early. Pick up the phone and ask for support. Find out if we can help you.