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Q&A - Credit card debt

Q. I have a considerable amount of credit card debt (three cards with approximately $9500 between them), a car loan (of approximately $10,000), and minimal savings. The reason for my dilemma being that I worked throughout my degree(s), and used any spare cash I had to pay for my education up front so that I could (ironically) avoid a HECS debt. I am now working full time, and have done so for the last two years, but have been reluctant to address this problem in the meanwhile. How can I get ahead? I really want to start saving, but I know that saving while paying all this interest would be fairly pointless. Is debt consolidation the way to go? Or is it better to transfer all my credit card debts to one card and take advantage of a limited-time interest-free offer (consolidating my credit card debt) and continue to pay the car loan?

Thanks so much for your help!

Susannah, Sydney, NSW

A. Dear Susannah, Thanks for your email, I am sure that a number of other graduates would be facing the same issues you are so I am glad you asked Switzer for help.

Susannah, as usual I have to say that I can’t provide you with personal financial advice but I can point you in the right direction.

From what you have said it seems to me that you can save money on a shoe-string budget if you have to, having paid off your HECS debt while studying. You have not told me how much you are currently earn and spend and this makes it hard for me to see where you are going wrong.

But I would suggest that the first step you should take is to pretend you are back on your university budget as much as possible. I remember being at university myself (it was a while ago, mind you), and all my lunches and dinners where all made at home, etc. The moral being you need to spend as close to nothing as you can for the next year.

The next step is that you have to stop using your credit cards. Not for anything at all, yes nothing! Do not worry about accumulating points, thinking you will pay for something on credit and pay it off straight away, this is a trap the banks want you to fall into. If you do your homework, you will find it is often cheaper to just pay for the flight with your own money. Anyway, you should not be going anywhere for the next year if you are serious about getting your debts under control.

The next step is to attack each card one at a time. Start with the card with the highest balance and/or interest rate. Pay it off and then cut it up. Yes cut it up. I would suggest the goal for you is to have only one credit card with a credit limit of $1,500 with no balance left on it after you pay off all your debts.

You asked about loan consolidation. To work this strategy you need to undertake a cost benefit analysis, comparing the interest costs you will pay on your credit cards if you pay them off within the next six to 12 months verses the associated costs of applying for a personal loan (including the interest rate cost). I am not sure which credit cards you have but some offer lower rates of interest, nearly the same as a personal loan.

If you have such a card this is the one to pay off last, the others have to go asap! Some points to note about loan consolidation:

Banks do not like this type of loan and it may be hard to obtain. The bank will ask you to cut up all you credit cards if they approve the loan (except theirs)

You can very easily end up with more debt if you are not disciplined and find yourself applying for another credit card. This will put you on the road to financial hardship (in my opinion).

You will need to continue to pay the minimum to your car loan while attacking your credit cards. Once your credit cards are paid off I would suggest making extra payments to your car loan, just make sure there is no penalty for paying this loan off early.

Susannah, your situation can be summed up as follows: you must live within your means, this is the most important lesson you will learn now you have left university. Once you master this lesson you are on the road to financial independence.

For advice you can trust, book a complimentary initial appointment with Switzer Financial Services today. 


Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



Published on: Tuesday, July 28, 2009

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