The government has proposed several new credit card reforms to curtail the dangers associated with plastic.
If passed, the reforms will require lenders to allocate repayments to higher interest debt first. As well it will prevent lenders from charging over-limit fees unless consumers specifically agree that their account can go over the limit.
In addition, the draft legislation would ban so called ‘tick a box’ unsolicited credit offers – such as credit limit extension that indicate cardholders have been “pre-approved” (giving the flase impression they can afford it).
Lenders will also be required under the draft bill to make cardholders aware of the implications of only making minimum repayments. Many cardholders are shocked to realize that it would take more than 24 years to repay an outstanding balance of $10,000 making only the minimum payments.
While the proposed new laws will help Australians avoid getting into debt, for many it’s already too late. If you’re looking for ways to climb out of the hole, then follow our top tips.
1.) Stop spending – seriously. Cut up the cards, freeze them, bury them – do whatever you’ve got to do to stop using plastic. This may also involve changing your spending habits and your attitude.
2.) Stop paying the minimum. Make a budget and look for ways to trim the fat and apply that money to the credit card. If you’re having problems finding money in your budget, look at ways to improve your income. Ask for a raise or start moonlighting.
3.) Prioritise repayments. If you have outstanding balances on two or more cards, then consider paying off the card with the higher interest rate first. If both cards are at the same interest rate, then concentrate on paying off the card with the lower balance. By paying this off aggressively (while still making the minimum repayments on the other card) you will gain confidence. After that card is repaid cut it up. Then concentrate on the other card. In addition to the minimum payment, contribute whatever you were paying on the first card and watch the balance quickly drop.
4.) Consider a balance transfer. Several credit card companies offer honeymoon rates for set periods of time that are zero interest or low interest. This can be a great way to get rid of your debt quickly, but should be avoided if you will be unable to pay off the entire balance during the introductory period.
5.) Consider a traditional debt consolidation loan. If you have several credit cards and other loans, rolling them all into one loan can be a convenient way to pay it back. But traditional debt consolidation isn’t an option for borrowers already too far in arrears. Before you commit to debt consolidation compare lender policies closely.
6.) Build an emergency fund. As you pay off your credit card debts, start putting a little away into a savings account. This will help you overcome the temptation of using your credit cards again should something unexpected come up.
7.) Get help. If you find you finances are out of control, get independent legal advice or see a financial counselor. But beware of predatory brokers and credit providers. As of 1 January 2011, anyone engaged in credit activities must be licensed with ASIC, have applied for a licence or be an authorised representative of someone who is licensed or applied for a licence. Anyone else is operating illegally.