Clear the festive hurdle

The Christmas spending splurge can lead to a credit-card headache at this time of year. A good New Year's resolution is not to let debt get out of hand in the first place. But the reality is that many people struggle to pay off their card debt, in full, by the due date. More than 70 per cent of the debt on credit cards is accruing interest.

What many people do not appreciate is that if the debt is not paid off in full by the due date each month, the interest applies to the debt going back to the purchase date, rather than from the end of the interest-free period. With a cash advance, the interest rate applies from day one. Interest rates on credit card purchases are generally between 14 per cent to 20 per cent a year, but can be higher. The only way to avoid paying interest is to pay off the credit-card debt in full by the due date and avoid making a cash advance. Note that the interest rate on cash advances is usually higher than the purchase interest rate.

Some people even have debts on their credit card or cards that were racked up over Christmas 2011. It is not a smart way to go. People could take advantage of ''balance transfer'' offers, where the credit-card debt is transferred to a zero- or low-interest-rate card. That is not a solution, but it buys time without having to pay interest, or not much interest, while working on reducing the debt. These cards have a zero or low interest rate that applies for a limited time, typically six months or so, after which they revert to the purchase rate or the higher cash-advance rate. The zero or low rate usually only applies to the balance that has been transferred from the old card, not to new purchases.

Once the credit-card debt is cleared, the better way to go is to use a debit card for everyday spending, with the credit card clear for emergencies. With a debit card, you are using your own money in the transaction account that is linked to the debit card, rather than borrowing at very high interest rates.

Only enough money to cover everyday spending should be in the transaction account, because the accounts pay very little interest. Longer-term savings would be better held in an online saver account or a term deposit that pays higher rates of interest.

Credit help lines and financial counsellors start to receive more calls at this time of year. Consumers usually do not call for help until well after they first receive notification from the credit provider about their overdue credit-card debt. However, continuing to ignore the problem is the worst option. The earlier the provider is approached, the more likely it is that an agreement can be reached to pay off the debt.

This story Clear the festive hurdle first appeared on The Sydney Morning Herald.