Stuck between “I need to save money” and “You only live once”?
Welcome to FY19! Hopefully you’re looking forward to some sort of tax refund as soon as that return is lodged! To start the new financial year on the right note, I thought it prudent to remind you of the ever existing debt trap at the beginning of a new financial year:
Before heading off on an overseas holiday, Sam decided to buy an expensive new camera to document his travels. The camera store offered a ‘buy now, pay later’ option. Attracted by the ‘no interest’ promise of the credit provider, Sam signed up.
All was well to begin with. Sam had a great time on his trip – in fact, maybe a bit too much of a good time. On returning home he’d maxed out his regular credit card and, with insufficient savings, he was unable to maintain the required repayments on his separate camera debt. And while, true to the issuer’s promise, he didn’t have to pay interest on the overdue payments, he was charged late fees on the repayments he skipped. Along with the standard payment processing and account payment fees, Sam’s camera ended up costing a lot more than he anticipated.
Plenty of temptation
The number of ‘buy now, pay later’ services is increasing. Afterpay, Certegy and zipPay are three examples, and you can literally purchase anything from white goods to overseas holidays through these services. Provided that payments are made on time, this type of service can be a great way to spread the cost of purchases over several months. Just make sure that the fixed fees aren’t too big a fraction of the total loan. For example, if you buy something for $1,000, and over the life of the loan, establishment and payment processing fees total $100, you’re paying 10% more than if you had paid in full at the time of purchase.
Seeing a good opportunity, several banks now also offer repayment plans on credit card purchases. These operate more like a loan than regular credit cards, with a fixed repayment term and regular instalment amounts. Unlike the other ‘buy now, pay later’ operators they may charge interest, although initially this is usually at a much lower rate than the standard purchase rate. However, if any payments are missed and an outstanding balance remains at the end of the fixed term, interest may be charged at the purchase rate. This is often well over 20% per annum.
Sam now faces a double whammy of a debt trap. While he’s meeting the minimum repayments on his credit card, the outstanding balance is accruing interest at 22% pa. Plus his ‘buy now, pay later’ debt is accumulating ongoing late fees. What can he do?
The textbook method for managing this situation is to take out a personal loan at the lowest rate possible and use this to pay off the existing debts. While the camera loan may not have an interest rate as such, left too long the fixed fees can add up to a significant percentage of the outstanding loan amount. By consolidating the debts Sam is left with one regular payment and with a much lower interest rate. This enables him to pay off the outstanding balance much quicker.
But Sam had another idea. He rolled over his credit card balance to a new card with a zero per cent interest rate on balance transfers for 12 months. This meant all his repayments went towards reducing the balance and he was also able to afford normal repayments on his camera loan. Sam knew that if he didn’t clear the card debt during the interest-free period he would again be saddled with high interest rates, but now being more ‘debt aware’ he was able to get on top of things and was on track to be debt-free within the year.
Let’s try and make this new financial year a year of being financially savvy! Sometimes, though, it is inevitable to use credit as unexpected expenses occur (or when the well deserved break blows the budget). However, always be aware of the exact terms and conditions of the loan or credit card – and be vigilant in your spending as it can quickly add up. As always, if you find yourself struggling with debt, we are happy to help identify the best options to get back on track and be debt-free.
MK Wealth Solutions is a Corporate Authorised Representative No 100223 of Synchron ABN 33 007 207 650 AFSL 243313. The information provided in this article has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your personal financial adviser before you make any decision regarding any products mentioned in this article. Whilst care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither MK Wealth Solutions and Synchron, nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.