December is here and the focus for many is Christmas shopping.
According to the Australian Retailers Association, Australian shoppers are expected to spend a whopping $45 billion between November 15 and December 24 this year - up from $43 billion during the same period last year.
Around $27 billion of spending is expected to occur on credit cards, according to finder.com.au’s Christmas Debt Survey conducted earlier this year.
Most people will take more than 30 days to pay off that debt, plus:
- Around 1 in 10 people will carry the Christmas debt (and incur interest on it) for 3 to 6 months
- over 5% will still have the debit for around for 6 to 12 months
- and 4% (estimated at 100,000 Australians) will start 2016 with 2014’s expenses still hanging over their heads.
Now that is alarming, and worse still, the next Christmas spending will start to creep in on the credit card and so the cycle continues.
At an average interest rate of 18%, Christmas shopping on credit is a very expensive proposition for many in addition to average spends of over $1,000 per person.
On top of buying gifts, there are the Christmas festivities and even the holidays and it’s all too easy to bring out the credit card and ‘worry’ about paying for it later.
So, while you have time, think about these alternatives.
Utilise your redraw or offset facility
Do you have extra funds in your mortgage account? In fact according to the Reserve Bank of Australia (RBA), these funds have risen to around 15% of outstanding loan balances. This means on average Australians have around 2 years of scheduled repayments (at current interest rates) at their disposal. With home loan interest rates very low, using this money as an alternative to the credit card is a much better way.
Switch credit cards – balance transfer
During January its quite common place to see offers of a credit card “balance transfer”. This allows you to transfer your credit card balance to a lower rate for a limited period. Disguised as a ‘hand out ‘gesture, it’s really a way for other providers to get a share of your debts, which when not paid out in the offer period, becomes a money spinner for them. Whilst it’s a viable alternative, doing this on a regular basis can adversely impact your credit file.
Consolidate personal debts with a mortgage
If you are having difficulties to clear the Christmas credit card debt, you could consider consolidating into your mortgage, so rather than paying 18% p.a. you will reduce the interest charge to a much lower rate and potentially saving thousands in interest charges over time. By taking this option it’s important to ensure the debt is not forgotten. Borrowers are strongly advised to make additional repayments to repay the Christmas debt in a timely manner.
Release equity from the mortgage
Some lenders allow ‘cash out’ loans, or equity release loans that allow you to borrow against the equity of your security for personal purposes, which may include holidays, a new car or potentially Christmas presents.
Time permitting you can arrange this prior to Christmas to avoid the credit card, or refinance after Christmas to repay the credit card while at the same time retaining the facility. Combining this with making extra repayments on the new loan, you will maximise the benefits of such a strategy.
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