Get ahead with the plastic

IT'S round about now that those post-festive season credit card statements start to arrive in the mail.

Even if your card wasn't given a serious workout around Christmas, you may have added a few back-to-school purchases to the balance.

The scary part is that by sticking to the card's minimum repayments you could still be paying off those new school shoes when your child trots off to work.

The beginning of the year often leaves us strapped for cash. That's when it can be tempting to only make minimum card repayments.

The trouble is, paying off the minimum will mean paying maximum interest charge. It also drags out the debt for what can be decades.

Let's say for example that you owe $2,000 on a card with an interest rate of 15%. By sticking to the minimum payment it could take 14 years to clear the debt. By that stage you would have repaid a total of around $4,191. That's potentially twice the value of your original purchases - and this assumes no new purchases are added to the card.

This card trap lies in the way minimum repayments are calculated. With most cards you're only asked to pay 2% of the balance each month. So, on a card debt of $2,000 you may only need to make a monthly repayment of about $40.

Here's the rub. That 2% is a lot less than the interest charges being added to the card each month. So the debt is growing at a faster rate than you're paying it off.

The only way to swing this around in your favour is by paying more. If you can manage to pay $80 off that same $2,000 card each month, the debt would be cleared in 2.5 years. The total amount paid would be $2,377 - giving you a saving of $1,841.

If you're not convinced about how long it can take - and how much it will cost - to clear your card by making only the minimum payments, take a look at the bottom of your next card statement.

Since mid-2012 statements have been required to carry warnings about the implications of only making minimum repayments. It can be eye-opening reading but I reckon it's good medicine even if it tastes bad.

A balance transfer offer that provides an interest-free period can help you get ahead with card debt. The big risk here is that unless you close down the original card account, you now have two cards to load up with fresh purchases. It can be a lot easier to focus on paying down the balance on your existing card as fast as possible.

For more ideas of bringing credit card debt under control, take a look at my book Free Yourself From 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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