New Zealanders' credit card habit costs $2m a day

Tuesday, 28 June 2016

You don't have to cut them up – but make sure you pay off your credit card in full each month.

You click open your credit card bill: $6000 to clear the balance or $120 to cover the minimum payment required. Which do you choose?

Too many New Zealanders are racking up substantial debt on their credit cards and paying off the bare minimum each month. It is costing them dearly – but it need not.

Credit card debt is some of the most expensive that New Zealanders have. It racks up at a rate of about 20 per cent per year – and if you do not pay your card off in full each month, you lose the benefit of the interest-free days on offer after each new purchase.

Reserve Bank data shows that Kiwis have about $6.5 billion outstanding on their credit cards and pay off about half of that each month.

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Research house Canstar says at the current average interest rates, that equates to about $747 million in credit card interest which Kiwis pay to financial institutions each year – or about $2 million per day.

It said people could save money by shopping around – the cheapest standard credit card it had on its database charged 16.9 per cent for purchases, compared to the highest rate of 25.45 per cent. The average was just over 20 per cent.

But hardly anyone really needs to be paying such high amounts of interest at all, says financial adviser Liz Koh.

If you have a balance you cannot comfortably pay off, you can opt to take out a loan from the bank to cover it – at a lower interest rate – or opt to transfer the balance to another bank's card.

ANZ and BNZ are offering 0 per cent on transferred balances. Others offer special low rates for balances transferred from other providers.

'It's probably just laziness,' Koh said.

'People are not paying attention to how much interest they are paying. Credit cards are easy to use when you are caught by temptation. People do the old zip zap thing of Paywave and they don't look. They probably don't realise the impact of making just the minium payment in a lot of cases.'

She said people found it easier to leave their credit card debt where it was than to go through to process of applying for a loan to cut the interest rate, or approaching another bank to transfer the balance.

'They don't want to be bothered with the paperwork. It's the same mentality as with hire-purchases, people buy something and it's $5 a week. They think '$5 a week, I can handle that'. But they don't think how much they are paying overall. It's cashflow not overall cost.'

Someone who is carrying a $10,000 credit card balance and transferred it to a 0 per cent interest rate would save $1961 in the first 12 months.