Credit card debt: How to avoid the credit trap

Published on: June 11th, 2019

It has been said that Australians, in general, have a love affair with credit cards and with hundreds of options available, they can be an attractive way to pay. But they don’t come without risks, as Australians have over $45bn AUD in credit card debt, a staggering figure. For many, it has become a real problem, causing financial issues and pain that can last many years.

Credit cards, in and of themselves, aren’t an issue: They are a convenient method to pay for many things in life and to manage your spending, particularly in an age where everything is digital and online spending is the norm. Where the issue arises is when you spend beyond your means to pay it back.

Tips to avoid the credit card trap

Here are my simple tips to avoid a credit card disaster:

1. Don’t spend more than you can afford to repay

Sounds simple right? But it’s often where people get into the most trouble. If you continue to rack up credit card debt beyond your means to pay for it, with the regular interest that accumulates it’s not difficult for the amount on your card to spiral out of control.

So rule number one: Don’t spend beyond your means to repay it.

2. Don’t have multiple cards

There are so many credit card options today that it can be tempting to have multiple cards. With bonus schemes, frequent flyer points, rewards programs, etc, there are many incentives to carry a number of cards.

Avoid the temptation and stick with one card. Often the rewards programs don’t stack up and provide very little benefit.

3. Use balance transfers…with care

Financial institutions use multiple incentives to make you switch cards. One of the most popular is the balance transfer, where you can transfer your balance from one card to another, interest free for a set period of time.

These offers can be incredibly helpful if you have already accumulated a credit card debt, giving you an extended interest free period to pay off the principal balance. However, where I have seen people put themselves into further difficulty is when they continue to spend on the new card, only adding to the debt!

So my tip here is to cut up the new card as soon as it arrives and simply use the account to pay down the transferred debt.

4. Have an emergency savings account

This one is a good tip in many ways, not just for credit cards. If you put some money aside into an emergency account, it will help if you do go a little overboard at some stage. You’ll have a reserve to pay it all back from and will avoid paying interest and potentially getting yourself into a debt cycle. 

5. Pay it back on time to avoid interest charges

Avoiding interest charges that just cause you to spend more money on your debt is an important tip; make sure you can pay back your card before these charges apply. It’s where most credit card users find themselves in trouble. Always know what the interest rate on your card is, some of the cards with fancier reward programs attract high interest rates, some even nudging 20%.

6. Think about a debit card instead

Most financial institutions now offer a debit card option, for example a VISA card that debits directly from your bank account rather than using credit. It’s a great alternative to using a traditional credit card that will ensure you live within your means

7. Leave the cards at home on a night out

With so many venues offering tap-and-go functionality today, it can be easy to spend way beyond your means without even realising. One tip I often employ myself is to take cash out before I go out and then I leave the card at home, that way I  can keep track of where my money is going and avoid overspending.

Feeling financial stress? You’re not alone! Organisations like Beyond Blue and Lifeline are there to help and offer free services.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.