Paul Clitheroe
Paul Clitheroe

Rethink your approach to credit cards

DEBT problems don't always have their foundation in overspending.

A 2012 report by Wesley Mission found unemployment, illness and relationship breakdown are among the biggest causes of debt troubles.

But if you're facing mounting credit card debt because of uncontrolled spending, it's important to face the issue head on.

Many Australians are channeling money into savings accounts, and that's a good thing.

Nonetheless our credit card debt remains high.

We collectively owe around $50 billion on our credit cards, and with card rates remaining stubbornly high, turning a blind eye to ballooning card debt is likely to leave you worse off further down the track.

That's because the interest meter is constantly ticking, and the sooner you take action, the easier it can be to clear the slate.

Getting on top - and staying on top, of card debt, often involves breaking bad spending habits and replacing them with good ones.

I often encounter the view that money problems would be solved if we earned a bigger income. Experience has taught me this isn't always a magic cure.

We have a tendency to increase spending as our income rises.

Besides, relying on higher earnings in the future isn't much of a solution to a pressing debt problem today. What you need to do is take control of what you earn now.

One of the key tools for this is a personal budget.

It will show exactly where your money is going.

Or, if you're not keen on budgeting try recording your spending for a month or two. It can be surprising to see how much money is wasted on minor purchases.

The real challenge in reducing card debt can centre on the way you view money and how you spend it.

As an example, a colleague of mine was telling me about her encounter in a checkout queue recently.

In front of her was an elderly lady, who was asked by the cashier if she would like to pay with cash or credit.

At this point the woman embarked on a lengthy dissertation about how neither she nor her husband had ever owned a credit card as they believe cards are a one-way ticket to overspending.

At one point the lady turned to my colleague and asked, "Don't you agree?" "Oh yes, absolutely" was the response, as she sheepishly slid her credit card back into her handbag while fumbling around for enough cash to pay for her small collection of purchases.

These sorts of encounters are reminders that there are plenty of Australians who don't automatically put purchases 'on the plastic'.

Instead they live by the motto, "if I can't afford it now, I can't have it until I have saved for it."

Stick to buying items you need (as opposed to just wanting); remembering that a bargain isn't a bargain unless you really need it; and learning to regard the balance of your bank account as your spending limit - not the limit on your credit card, are central to freeing yourself from card debt.

Follow these simple guidelines, and it's much harder to go wrong.

For more ideas on reducing credit card debt, take a look at my book Free Yourself From Debt.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit for more information.

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