Breaking the Lock of Credit Repayment

It’s not uncommon for credit card owners to continously recycle their balance month-to-month, using their paycheck to repay their debt.

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While on the surface, they responsibily repay their debt without fail and never effectively accumulate interest, they risk falling into financial hardship by constantly living off their credit card balance.

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Case Study: Adam gets paid monthly. He earns $4000 a month, and $2500 of his pay goes to groceries, bills and necessities. From time to time he becomes impatient and thinks ‘It’s ok for me to spend up to $4000 on my credit card a month, I get paid $4000 a month‘.

Adam spends his present life living on +$0 to -$4000. While he gets by and is relatively financially stable with his ‘tamed debt’, if he comes across an emergency, he has no backup source of funds. He can apply for more credit, but will need months to repay his entire combined credit cards balance, thus racking up interest and costing him dearly.

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‘Paying with Plastic‘: The age-old concept comes into play with consumers like Adam - ‘It’s easier to pay with plastic than cash’. If Adam had $4000 of savings, and spent $2500 on his necessities, he would be less inclined to spend the remainining $1500 on luxuries if he were to physically withdraw money from the ATM and pay with cold hard cash.

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What is the Main Risk of Living in ‘Tamed Debt’?

Assuming you’re living off credit because you have no savings, should an emergency arise, there is limited financial backing to cover the expense.

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When is it Acceptable to Live on a Monthly Balance Repayment Cycle?

If one owns a reward program credit card, they should maximize on all the purchases they can make on their card, providing they can repay their balance. Yet if no rewards are being earned from living off credit cards, and the user has no savings, then it is simply a ticking time bomb until the user get caught up in prolonged debt.

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How can I Break the Monthly Repayment Cycle?

Follow this simple rule of thumb: If the purchase depreciates in value, do not buy it on credit. This includes, but is not limited to:

• Restaurants, Dining out
• Clothes & Fashion
• Technology & Electronics

By avoiding these luxuries and ‘wants’, a consumer such as Adam can effectively save money.

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Treating yourself with excessive shopping and occasionally going ‘credit-card-crazy’ is something practically all Australians can’t avoid, whether it be out of impulse or for the holiday season. Yet if you’re living month-to-month on a revolving balance, or using all of your pay to repay your debt, a reassessment of your spending habits may be necessary to avoid getting trapped in debt.

• Comparison of Top 10 Credit Card Offers

Editor's Choice: Our Top Credit Cards

Credit Card	Card Details	Interest Rate (p.a.)	Cash Advance Rate (p.a.)	Balance Transfer Rate (p.a.)	Annual fee	Interest free days (up to)
HSBC Credit Card	Editor's Choice: 0% for 6 months Balance Transfer & No Annual Fee Featuring a $0 annual fee for life, and 0% p.a. balance transfer for 6 months, the HSBC Credit Card was voted the Best Transactor Credit Card for 2010.	16.99%	20.75%	0% for 6 months	$0	55
Suncorp Clear Options Standard Visa Card	A great 12 month balance transfer offer, combined with a low annual fee and a good interest rate on purchases.	12.24%	17.99%	1.9% for 12 months	$39	0