Christmas card crazy

By MARK FRYER

Between the beginning of this month and January 1, when we wake to nurse the national hangover, New Zealanders will have racked up another $1.8 billion on our credit cards.

Which is, to put it another way, about $620 in extra debt for every one of us aged 18 or more, all in the space of a month.

Does it matter?

No and yes. No if you're in a position to follow rule number one for credit-card users: pay it off in full, every month.

Yes if you cannot do that.

If you are in that second category, now is the time to remind yourself that credit cards are an extremely expensive way of paying for your Christmas cheer.

Credit card use has risen rapidly in recent years, for all the obvious reasons: they are convenient, you can win rewards or cash back, there are no transaction fees and they can even make you money (just as long as you don't forget rule number one).

While credit card debt is no longer rising by 20 per cent or more a year, as it was until the end of last year, it is still increasing much more rapidly than our incomes are.

As of October, the total outstanding on our cards was $3.53 billion. While that's a lot of money in anyone's language, it's not the size of the debt that matters; the real question is how much of it is accruing interest.

According to Reserve Bank figures, the answer to that question is 72 per cent.

This suggests that, whatever our intentions might have been at the time we whipped our cards out of our wallets, most of us aren't willing, able or organised enough to live by rule number one.

And, again according to Reserve Bank figures, the interest rate on that credit card debt has been rising this year, to the point where the average rate on credit card debt was 18.8 per cent in September, the most recent month for which figures are available.

At a time when inflation is running at under 3 per cent a year and the banks are offering fixed-rate mortgages at less than 7 per cent, that counts as expensive borrowing indeed.

What to do?

First, be aware how cards work. While they are a way of borrowing without paying interest, that's only the case if you pay off the entire amount outstanding each month.

If you don't, you will be charged interest, typically from the date of each transaction.

Any further purchases may also incur interest payments, until you clear your card.

And be wary of using your card for cash advances. Not only will you be charged interest from day one, you may also have to pay a transaction fee every time you get cash.

If it's just forgetfulness that keeps you from paying off your card, set up a direct-credit to make the payment automatically by the due date every month.

If you just don't have enough money to make the monthly payments - and wishful thinking is not your friend when it comes to making that judgment - the only answer is to use your card less. Either cancel your card or, if you can't do that, at least take it out of your wallet to avoid temptation.

No, this isn't the easiest time of year to go cold turkey, but try buying fewer or cheaper presents, attempt to convince your friends and family that it's the thought that counts, and console yourself with the idea that things should be better this time next year.

If you have a persistent credit card debt, think about moving to one of the lower-interest cards now on the market. They may not offer an interest-free period but that doesn't matter if you always have outstanding debt, because you will be paying interest whatever type of card you have.

But remember that even the low-interest cards aren't exactly cheap borrowing.

If you have a mortgage, think about increasing it to pay off your card debt. However, this only works if you keep your card under control in future.

If you start running up the card again you'll end up with more card debt and a bigger mortgage.

And have a happy Christmas.

* Write to Personal Finance Editor Mark Fryer at: Weekend Herald, PO Box 32, Auckland. Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423.


* Email Mark Fryer