CLITHEROE'S CALL: How to watch your credit debt

CREDIT cards can be tremendously handy, but they also offer one of the most expensive forms of personal debt - and despite banks being forbidden by law since 2012 from offering unsolicited increases in credit card limits, our card debt is growing.

Australians collectively have outstanding card debt of $33 billion, which is accruing interest at a staggering average rate of 17%.

More worrying, the credit limit on our cards is creeping up, opening the door to even more card debt.

Comparison site Finder has found Australian households have access to almost $150 billion in potential debt based on current card limits. That's an increase of $4.6 billion in just 12 months.

To put this in perspective, the average limit per credit card is a whopping $9069, and many of us own more than one card.

It begs the question, how have credit limits risen so much when financial institutions have been banned since 2012 from making unsolicited offers to increase card limits?

Part of the answer is that card issuers are not prevented from offering new cards to the same customers. Finder says this has led to an increase in the number of people holding multiple credit cards.

Along with the possibility of overspending, holding multiple cards - or having an over-the-top card limit - brings the risk of high interest charges that drain household budgets.

Consistently carrying a card debt of $3000, for instance, could result in you paying $2550 in interest over five years. That's a big slug of cash.

The simplest way to avoid or minimise card debt is by paying off the full balance each month, or at least pay more than the minimum.

As you pay off your card balance, ask the lender to lower the credit limit. And resist offers to sign up for additional cards.

Switching to a cheaper card can provide valuable savings on interest, and there are credit cards available with rates below 10%.

Be sure to contact the card issuer and ask them to cancel your old card. It can be too tempting to reload the newly cleared card with fresh purchases, leaving you even deeper in debt.

For more ideas on managing credit card debt visit the government's Money Smart website or check out 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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