Six strategies for taking control of your credit card in New Zealand

Monday 13 April 2015, 2:35PM
By Harold French

1. The best policy is to cut costs – less flat whites and take-away lunches (you can probably make better sandwiches at home far cheaper anyway) – and pile the spare money into paying off your debt.

2. Get a personal loan.

On the face of it, taking out a personal loan to pay off a credit card in New Zealand might sound nuts - it just isn’t something Kiwis do, is it? But, when you pause and consider, it could make perfect financial sense.

There are a few reasons why a personal loan may be a good option to pay off your credit card.

  • Personal loans have end dates. Credit cards don’t.
  • A personal loan is finite. You cannot borrow more on the initial sum without going through the whole application process all over again.
  • You cannot over-draw on a personal loan, and as a result you will not be vulnerable to penalties and interest payments associated with going over your limit on a credit card.
  • Personal loans, like credit cards, are usually unsecured. That means your financier won’t take your stuff if you miss a couple of payments (though it must be said missing payments should be avoided at all costs because it will cost you in fees and penalties)
  • Personal loans will usually require a lower interest rate than credit cards. Let’s say you have a consumer finance credit card with an interest rate of 25%. It makes perfect sense to get a personal loan at an interest rate of 14.99% to pay off the credit card, lock in your debt at a lower interest rate and know there is an end in sight.

3. Buy a tube of ice-cream

Enjoy the ice-cream to help you de-stress. Next, fill the ice-cream tub half fill with water and put it in the freezer. When the water is frozen, take it out, put your credit cards on the ice and fill-up the remainder of the tub with water. Put the tub back in the freezer, safe in the knowledge that your credit cards now occupy the centre of a very thick block of ice.

By making your credit cards very difficult to use, and limiting convenient access to those cards – out of sight, out of mind – you will be free to concentrate on paying off the credit cards instead of swiping them when temptation strikes (which is too frequently for most people). Next, it’s off to the gym or a run to work off that ice-cream.

Another trick to limit access may be to give your credit cards to somebody you trust, like mum, for safekeeping (so long as she doesn’t live with you). The need to justify why you need the credit cards - especially if the reason is spurious – lends a sense of accountability and reluctance to go down that path at all if you really don’t have to.

Either way, both options give you time to pause and think about your spending rather than suffering shopper’s guilt afterwards.

Some people advocate cutting up your credit cards, but that doesn’t make sense because credit cards, if used properly, do have a useful purpose. Hiring a car or a hotel room for one, but they are particularly useful when an emergency strikes - like car trouble – and you need access to money in a hurry.

4. Delete your credit card details

If you’re like most people, your credit card details will be registered with the likes of Amazon and Apple, which makes it just a little too convenient so spend. If you’re cutting back on your credit card debt and want to get on top of payments, delete your credit card details from your profile – particularly since many of these online shopping sites will be for discretionary and luxury spending anyway.

5. Consider a debt consolidation loan

A debt consolidation loan differs from a personal loan in that it allows you to borrow to specifically pay off a number of debts. Many people will borrow from Peter to pay Paul. In other words, they will divert money from one payment to pay another more urgent payment, and they spend their lives juggling Peter, Paul, Tom, Dick and Harry.

Former GE Money NZ managing director Aaron Baxter told the Businessday* website that a debt consolidation loan only works if the benefits outweigh the cost of the new loan - so make sure the interest rate on your debt consolidation loan is lower than all your other debts.

Using credit to pay for credit is a sign that you are in trouble and need to take action.

A debt consolidation loan is a far smarter way of borrowing from Peter to pay Paul, and Tom, and Dick and Harry… because you only have to do it once.

6. Negotiate with creditors

Pick up the phone, call your creditors and negotiate with them to secure a lower interest rate, a freeze on your card or a repayment option that works for both of you.