Australians have more than $38 billion owing on credit cards, which is an average of $4,900 per card holder . And if you hold multiple credit cards (which many of us do) your total credit card debt could be double or even triple this average amount. If this is the case, you may be paying a lot in interest repayments.
The cost of borrowing money
The ability to borrow money is a wonderful thing. For example, it allows us to buy items when they’re on sale rather than waiting until we have the spare cash. And how many of us would be able to purchase a house with cash? Unfortunately, many people get too caught up in the euphoria of buying things without giving enough thought to how they are going to repay the money. The simple fact is borrowing money comes at a price. This price is your interest repayments.
Interest charges accrue on your outstanding debt until it is repaid in full. All it takes is a few different credit cards with different lenders on top of a large mortgage or personal loan and before you know it, you’re feeling the pinch of too many interest repayments.
The costs may be higher than they first appear
Money that you borrow for personal use, such as credit cards, car loans and mortgages, is called non-deductible debt. This term refers to the fact that the interest you pay on this debt is not tax deductible. So when it comes to the real cost of your debt i.e. the after-tax cost, you may be paying more than you think. For example, if the interest on your credit card is 7%, that’s the equivalent of paying 10.8% on an after-tax basis assuming you’re on a marginal tax rate of 35%.
Focus on reducing your non-deductible debt
Due to the high after-tax cost of interest on non-deductible debt you should make it a priority to reduce this type of debt. If you have any surplus cash, consider using this money to pay a lump sum off your non-deductible debt, such as a credit card or car loan. This will reduce the amount of interest you’re paying, making your repayments more manageable and improving your cash-flow at the same time.
And you can use this extra cash to reduce your interest payments elsewhere. For example, if you have a mortgage, you could direct this extra cash-flow to your mortgage offset account. This way, it will still be available to redraw if you need emergency funds, but it the meantime it will help reduce the total interest you pay over the life of your home loan. This may even reduce the number of years it takes to pay off your mortgage so you’ll own your home sooner.
This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs.
GTC Financial Services Pty Ltd ABN 94 010 624 914 atf GTC Financial Services Trust ABN 69 596 897 575 is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523