The total credit limit for all cards was $21.3 billion in November, 2.2 per cent lower than December 2021, and the lowest level since April 2015.
Tom Hartmann, personal finance lead at money help website Sorted, said tougher rules around lending could be leading to people dropping their credit limits to get other loans like mortgages.
“A higher credit limit isn’t necessarily better in the sense that it can limit your other borrowing. I think maybe people are getting that as they apply for credit.”
Hartmann said people should look for a “goldilocks limit” - an amount that met their use requirements but was still comfortable to repay.
“It used to be like bragging rights - hey I’ve got a $30,000 credit limit on this credit card - but that is not being seen as that much of an advantage anymore because sure, you could put a car on a credit card, but would you really want to?”
But just over half (51.8 per cent) of credit card advances were interest bearing with the average rate on those advances 18.6 per cent, up from 18.2 per cent in December 2021 and 18.1 per cent in December 2020.
Hartmann said interest rates for credit cards, which were deemed to be unsecured lending, had remained high even in the low-interest rate environment.
Tackling the debt
Card users who couldn’t make minimum payments should talk to their lender, Hartmann said.
“Let them know because that triggers a set of extra services available to you, as they are trained to support people. If you find yourself out of work.”
Another option was to talk to the free financial advice service Money Talks on 0800345123.
“There is a team at the ready to really be in your corner and support you and help you as you work through a situation like that.”
Others were able to make minimum payments but this left them paying the interest.
Hartmann said for many families this time of year presented a Bermuda triangle of cost with Christmas, the holidays and back-to-school costs all piling up.
“It’s not hard to load up the credit card to get through this time.”
He said those carrying a balance could use a new debt calculator on Sorted to help them chart the best way to get the debt down by putting all their loan information in one place to see how much it was costing and target the ones costing the most.
“There is a couple of different strategies depending on how much debt and how many kinds of debt you are carrying all at once.”
Hartmann said credit card debt was sticky and so people needed a plan to get out of it.
“That really comes with charting your incomings and outgoings and finding extra money to funnel towards taking down that debt.”
Jose George, general manager of Canstar New Zealand, said if you have family loans or cash in a savings or deposit account not earning as much interest as the interest rate charge on the credit card it was better to use it to pay off the card.
“You want to paying off to be paying down your highest interest-bearing loans in the first place.”
Low-interest cards
Another option can be transferring the balance onto a no or low-interest rate credit card.
George said that allowed a person time to pay it off.
“I’m not suggesting it is easy to get your way into one of those. The banks would do a proper assessment before they allow you to transfer your balances across.”
George also warned users to be wary of the fees charged for transferring the debt and to ensure it was taken out over a longish period, not just for a couple of months.
“The third thing we always recommend is don’t use that card for other purchases as far as possible. You want to treat it as a vehicle to park existing debt and manage it down.”
If you transfer $1000 and buy something for $500, then pay $500 the $500 would not pay down the transfer amount. “You want to be careful of that.”
He also urged people to remain consciously across the debt rather than feeling like the problem is solved.
Hartmann said a balance transfer could be a good idea but still required a plan to ensure the debt was paid off. If there was a time limit on the low rate the debt needed to be paid off before the end or it would revert to a higher rate.
“You want to make sure you don’t wind up in more debt.” If you are able to transfer your balance to low-interest card but you still have the other card make sure you cancel it and cut it up.”
George said other options were rolling the credit into a debt consolidation loan or a flexible or revolving mortgage where rates were currently around 7.5 per cent.
Avoiding a repeat
Hartmann said to avoid repeating the same situation in a year’s time he recommended setting up automatic payments to set aside small amounts on a regular basis to pay for expected costs like Christmas presents, holidays and school stationary.
“The good news is we can plan ahead.”
“It might be $10 a week but it grows over time and to have that money in place for each of those three things in the triangle will definitely put you in a much more secure position for next year when all of this comes around again.”
George said it was also important to ensure you had the right kind of credit card for you.
“If you are someone that tends to roll balances there are options in the market for low rate interest cards.”
He said rewards cards were great for earning rewards but they came with the sting of high-interest rates and meant they were not best suited for those who did not pay their credit card off in full each month.
