Credit card debt reduction always a good idea

With the average credit card balance at its highest ever and households handing over a record proportion of their income in interest payments, people are starting to talk about turning back the clock on debt.
Some researchers are seeing a change in attitude to indebtedness among the under-25s in particular - a harking back to the financial caution exercised by their grandparents and great-grandparents.
Members of the internet generation may be more inclined to take a back-to-basics approach to consumption, says social and economic commentator Phil Ruthven, saving for the goods they want, rather than racking up credit card debt and personal loans.
"I think we will begin to see some more financial sanity emerging," Ruthven says of emerging consumers.
"The [net generation isn't] terrified of debt to the extent our parents and grandparents might have been, saving up for everything," he says.
"We're not going to move back that far - but I think the net generation are likely to be much more prudent and savvy with their finances."

This will be in reaction to witnessing debt cause stress among family and friends, but also part of the personality of this particular generation.
"The net generation is a 'civics' generation, which comes around every four generations," Ruthven says. "You could describe it as a little less materialistic - they see material things as a means to an end, rather than an end in themselves."
Social researcher Mark McCrindle, of McCrindle Research, says generation Y - teenagers to those aged in their mid-20s - has grown up with credit cards and never known a recession, so this age group tends to have high consumer expectations.
"But there's light at the end of the tunnel," he says. "They are the most materially endowed generation ever but they've found that doesn't satisfy them - that there's got to be something more. So there's a 'live slow' movement, a 'buy slow' movement - there's some little glimpse of what might change."
For now, financial advisers say that even clients on good incomes are experiencing stress over the level of their borrowing. It may not be enough to tip them over the edge financially but they are nevertheless feeling less than comfortable.
In lower-income communities, debt counsellors are seriously concerned about the prospect of an interest rate rise in coming months and outright dismayed by speculation there could two to three rate rises in the next 12 months.
Trading on the bond market indicates that an official rate rise of a quarter of a percentage point is an even bet for August and a certainty by November, with another rise priced into bonds for the first half of next year.
Rory Robertson, an interest rate analyst at Macquarie Bank, says the Australian Bureau of Statistics's inflation report, due out on July 25, will "make or break" the case for a rate rise as early as August.
By his reckoning, if the consumer price index trend figure is above 0.5 per cent, the Reserve Bank will act.
Advisers say such circumstances make it more important than ever to go back to the basics: budgeting, saving, and being disciplined about repaying any debts.
"The two words I use are planning and discipline," says Laura Menschik, the managing director of WLM Financial Services.
"People have to understand the difference between buying something right now and doing it a bit later, when they've been disciplined and saved for it - or even going without because they may not need it."
Menschik rolls off some examples: if you use the redraw facility on your mortgage to buy things, be disciplined about repaying that money over a couple of years rather than 25 years; leave a buffer for unexpected events such as the car breaking down or your roof blowing off; pay more than the bare minimum on your cards and loans.
And think about cutting up your cards. Menschik isn't alone in seeing people set about getting their finances in order - often by consolidating their debts in their mortgage or a personal loan at a lower rate - only to fall off the wagon and run their credit cards up again.
Karen Cox, the co-ordinator of the NSW Consumer Credit Legal Centre, says people don't always address the underlying problem that got them into debt in the first place, "which is that they're just living beyond their means".
"I don't say that in a judgemental way - I know a lot of people are struggling just to meet everyday expenses," Cox says. "But having debt doesn't help. It just makes it worse."
Financial planner Suzanne Baldry, of Baldry Financial Group, says a budget should be the foundation of any financial strategy.
Budgets might be considered boring and old-hat, but they work, she says - as long as they're the right way round.
"You've got to work out what your commitments are before you work out what you're going to spend - not the other way around," she says.
"It's not a case of 'what have I got left over for my debt repayments'."
Lisa Armstrong, the head of consumer advocacy for mortgage broker Resi, says people tend to fall back into old patterns if they don't change something about their spending behaviour.
She suggests reducing the limits on your credit cards - and resisting offers to move them higher. You should be able to pay off your card debt every month, she says.
Even better, switch to a debit card that has the convenience of a credit card but uses your own money.
Heaven forbid, you might even consider using cash again.
"It's just not an emotional transaction when you hand over a card - it has no meaning to us," Armstrong says. "But when you hand over your hard-earned cash, out of your wallet, you can see what [that purchase] has just cost you."
Money asked the experts to tell us what works and what doesn't when it comes to modern-day debt.
Mortgage redraw
Rather than running up credit card debt at interest rates of 16 or 17 per cent, many people now use their mortgages to fund consumption - a practice that financial planner Suzanne Baldry says is turning mortgages into "residential ATMs".
People draw on the equity in their home, or redraw extra payments they've already made, for spending such as renovations, holidays, clothes, cars and flat-screen TVs.
Alternatively, they consolidate more expensive debts by rolling them into their mortgage.
Baldry says this is fine so long as you're disciplined about repaying that money quickly, rather than spreading it over 25 or so years.
"Not increasing payments to cover this is bad news," she says.
Denis Orrock, of researcher InfoChoice, agrees. He says that doing so spreads a debt that would normally be paid off in three or five years across two decades, adding thousands of dollars in interest charges despite the lower rate (see table, above right).
"Putting debt into the mortgage is a great idea, but you have to pay more," says Lisa Montgomery of Resi.
"You have to pay a lot like you were paying before [when the debt was on your credit cards]."
Personal loans
Orrock says personal loans may be more costly than home loans but they have the advantage of instilling discipline in borrowers.
"Some people do need the discipline of a certain payment every month for a set period to pay things off," he says. "There's a lot to be said for that."
St George Bank's head of consumer lending, Ed Box, says personal loans are much more flexible these days - they can be fixed or variable rate, and some now allow early repayments. He advises tailoring your personal loan to suit your circumstances - for instance, by having the repayment periods set weekly, fortnightly or monthly, in line with when you receive your pay.
Credit cards
A lower rate may not mean you're better off when it comes to credit cards. The consumer group Choice says whether you're better off will depend on the way the interest on overdue amounts is calculated.
You could be worse off if the card charges daily interest on the full, original purchase amount even if some of the balance was repaid on time, or if interest is charged right back to the original purchase date rather than from due date or statement date. Also, you might lose your interest-free period for new purchases if any debt is carried over from the previous month.
Interest-free deals
It's tempting to take advantage of "buy now, pay later" deals but Karen Cox says the Consumer Credit Legal Centre sees a lot of people struggling with very-high-interest debt that started out as interest-free debt. Sometimes no repayments are required at all for the interest-free period, and people take the optimistic view that they'll be able to pay for the goods after the one-, two-or even four-year period.
But that may not happen, or their circumstances may even be worse, Cox says, and the debt ticks over onto a very high rate of interest.
"Others require regular repayments but the repayment you're told to make is based on the standard minimum credit card payment and has nothing to do with paying it off in the interest-free period," she says. "People think they're paying it off but they're actually not. You make a fairly small hole in it on some of them."
Retailer David Jones provides two figures for interest-free options when it sends out its monthly store card statement: the minimum payment due and the amount "payable to minimise further interest charges".
The minimum payment is lower than the amount that would "minimise" interest charges.
Cox says some lenders don't even provide this level of information.
For all those reasons, consumers should think twice before flashing their plastic.
Source: Sydney Morning Herald