debt-lag

Debt Lag: How to deal with debt after a holiday

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Stuck with stubborn credit card debt after a holiday? You may be experiencing 'debt lag'.

Credit cards and travel seem to go hand-in-hand these days.

A recent survey conducted by finder.com.au found that 85 per cent of Australians used their credit cards on their last trip and 48 per cent of us paid more than half of our trip using our card.

It's not hard to see why credit cards have become such a popular addition to any trip. There are currently more credit cards which waive foreign transaction fees than debit cards and cards can come with a range of features such as the ability to earn rewards points or the offering of complimentary travel insurance.

Unfortunately when you're on a holiday it's not hard to overspend on your credit card and forget about the consequences.

The result of this overuse of your credit card is 'debt lag' - credit card debt which lasts long after the memories of your holiday do.

According to our survey, $401 million in interest has been amassed by Australians through trips taken over the past year from October 2013.

And when it comes to paying our trips back, 15% of us won't be able to pay off our trip within six months and 5% of us will have gone on another trip before paying this previous trip off.

Let's look at a simple example of how debt lag can occur.

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ANZ Fixed Rate Personal Loan

ANZ offer a competitive interest rate personal loan with a low ongoing monthly administration fees.

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Debt Consolidation Personal Loans Comparison

Rates last updated June 28th, 2017
$
Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Application Fee Monthly Repayment
Citi Personal Loan Plus
Borrow up to $75,000. All approved applicants will receive the advertised variable rate of 11.99% p.a.
From 11.99% (variable) 12.77% $5,000 3 to 5 years $199 (monthly fees waived in the first year) Go to site More
CUA Discount Fixed Personal Loan (Loans over $30,000)
Take advantage of a competitive fixed rate and no monthly fees when you borrow over $30,000
From 10.99% (fixed) 10.99% $30,000 1 to 7 years $0 Go to site More
Pepper Money Unsecured Fixed Rate Personal Loan
Apply for up to $50,000 and receive conditional approval within minutes.
From 9.99% (fixed) 9.99% $5,000 1 to 7 years $0 Go to site More
Latitude Personal Loan (Secured)
Can be used for whatever purpose: renovating, buying a car, booking a holiday. Funds can be in your account in as little as 24 hours.
From 12.99% (fixed) 14.2% $3,000 2 to 7 years $250 (Loans under $4000 - $140) Go to site More
QT Mutual Bank Personal Loan
You can use this personal loan to buy just about anything: a new boat, home renovations, a holiday or even to consolidate existing debt. Only available to Queenslanders
From 12.95% (variable) 13.54% $3,000 5 years $395 (establishment fee) Go to site More
MyState Unsecured Personal Loan
Apply for up to $50,000 and make additional repayments without penalty.
From 12.99% (variable) 16.42% $3,000 1 to 7 years $200 Go to site More

Mandy’s Mauritian debt dive

Mandy found a great holiday package to fly to Mauritius with her friend. She paid for her flights and hotel accommodation with her credit card - a total of $4,000 for eight nights. While she was over there she spent a total of $2,000 in activities, food and shopping.

Mandy comes back home and realises that while she's tanned and relaxed, she has a bill of $6,000 on her credit card. Later on she finds that a hefty sum of money has gone towards the foreign transaction fees and international ATM withdrawal fees she was charged, making her part of the 29% of Australians who come home after a trip to credit card shock.

Mandy budgets to pay off her trip within six months and puts $1,000 onto the balance each month. By the time her debt is paid off her total interest bill is $233.

Let's look at how much interest would be charged on different balances and over different time periods.

How much interest are you paying?

finder.com.au’s debt-lag remedies

If you've found yourself in debt-lag there are a few key ways to wriggle out from underneath.

Conduct a balance transfer

If you've got a pile of travel-related debt accumulating interest each month you could do a lot worse than switching it over to a credit card with a low or 0% p.a. interest rate. This is known as a balance transfer and can save you a lot over the course of the loan.

If Mandy had transferred her $6,000 over to a card with a 0% p.a. balance transfer offer and an annual fee of $55 she could've saved $178, provided of course her $1,000 a month repayments were kept up.

There are a few considerations to make when comparing balance transfer cards.

Be sure to compare the annual fees they charge and know what the revert rate is. If Mandy decided to apply for the above card and then failed to pay off her balance transfer in the promotional time period, she'd start paying interest at the revert rate. This can be the purchase rate or the higher cash advance rate, so know what this is if there's a chance you won't pay the balance off in full.

Find a debt reduction strategy which works

If you're not able to carry out a balance transfer, or don't want another credit card to tempt you, there are still some ways to reduce your debt faster and avoid interest.

The biggest and most obvious is to pay more than the minimum repayment amount. Minimum repayments can be as small as 2% of the outstanding balance or $10 per month.

A $6,000 debt at 17.70% p.a. with minimum repayments of 2% or $20 will take 34 years and six months to pay off and interest will balloon the total sum paid to $20,126.

Bumping these repayments up to $500 a month would cut this time down to one year and two months and bring your holiday cost to a total of $6,545. If you bumped them up to $700 a month you'd pay your debt off in nine months, bringing your debt to a total of $6,332 when interest was factored in.

If you fly back home to a mountain of debts including your trip, loans and other credit cards, it may be good to put your debts into some kind of order before paying them off. One way to do this is the debt snowball method, which sees you order your debts from smallest to biggest. You then focus on these smaller debts first, slowly ramping up your repayment size until you tackle your biggest debt

Alternatively you could pay off your debts with the highest interest rate first.

0% Balance Transfer Credit Cards

If you are struggling to pay down the balance of your credit card, consider transferring your balance to a new account.

Rates last updated June 28th, 2017
$
% p.a.

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Name Product Balance transfer rate (p.a.) Purchase rate (p.a.) Annual fee Interest Saved Product Description
St.George Vertigo Platinum
0% p.a. for 20 months
12.74% p.a.
$99 p.a.
A low rate Platinum card with up to 55 interest-free days on purchases and access to Visa's Platinum Concierge service.
St.George Vertigo Visa
0% p.a. for 14 months
13.24% p.a.
$0 p.a. annual fee for the first year ($55 p.a. thereafter)
Save with a low ongoing purchase rate and up to 55 interest-free days.
Citi Rewards Platinum Credit Card
0% p.a. for 24 months with 1.5% balance transfer fee
20.99% p.a.
$49 p.a. annual fee for the first year ($149 p.a. thereafter)
Earn Citi Reward Points on everyday spend and receive complimentary travel insurance.
ANZ Platinum Credit Card - Exclusive Offer
0% p.a. for 12 months
0% p.a. for 3 months (reverts to 19.74% p.a.)
$0 p.a. annual fee for the first year ($87 p.a. thereafter)
An exclusive credit card offer through finder.com.au that includes complimentary insurance covers.
HSBC Platinum Credit Card
0% p.a. for 22 months with 2% balance transfer fee
19.99% p.a.
$99 p.a.
Offers an annual fee refund with a yearly minimum spend of $6,000.
Virgin Australia Velocity Flyer Card - Exclusive Offer
0% p.a. for 18 months
20.74% p.a.
$64 p.a. annual fee for the first year ($129 p.a. thereafter)
Earn 2 Velocity Points on top of the standard earn rate per $1 spent in the first 3 months, plus a $129 Virgin Australia Gift Voucher each year.
Bank of Melbourne Vertigo Platinum
0% p.a. for 20 months
12.74% p.a.
$99 p.a.
Receive a range of complimentary insurances and access to a 24/7 Visa Platinum Concierge.
Bankwest Breeze Mastercard
0% p.a. for 21 months with 2% balance transfer fee
12.99% p.a.
$59 p.a.
Offers a low ongoing purchase rate and up to 55 days interest-free on purchases.
BankSA Vertigo Visa
0% p.a. for 14 months
13.24% p.a.
$0 p.a. annual fee for the first year ($55 p.a. thereafter)
Save with a low ongoing purchase rate and enjoy up to 55 days interest-free.
NAB Low Fee Card
0% p.a. for 16 months with 2% balance transfer fee
19.74% p.a.
$30 p.a.
Receive up to 44 interest-free days on purchases and complimentary Purchase Protection Insurance.
HSBC Low Rate Credit Card
0% p.a. for 15 months with 2% balance transfer fee
13.25% p.a.
$55 p.a.
Enjoy the benefits of the home&Away Privilege Program and the ability to pay using Apple Pay.
Westpac Low Rate Card - Online Only Balance Transfer Offer
0% p.a. for 24 months with 2% balance transfer fee
13.49% p.a.
$59 p.a.
Offers a low introductory rate on purchases and up to 55 interest-free days.
Citi Simplicity Card
0% p.a. for 6 months
19.99% p.a.
$0 p.a.
Pay no annual fee for life and receive free bottles of wine from Citibank Dining Program.
Virgin Money Low Rate Credit Card
0% p.a. for 12 months
11.99% p.a.
$99 p.a.
Enjoy a low ongoing purchase rate and the optional protection of CreditShield Edge.
American Express Explorer® Credit Card
0% p.a. for 12 months with 1% balance transfer fee
20.74% p.a.
$395 p.a.
Receive 50,000 Membership Rewards Bonus Points on eligible spend within the first 3 months of card membership.
American Express Essential®  Credit Card
0% p.a. for 12 months with 1% balance transfer fee
14.99% p.a.
$0 p.a.
Earn 1.00 Membership Rewards point per $1 spent on eligible purchases.
American Express Velocity Platinum Card
0% p.a. for 12 months with 1% balance transfer fee
20.74% p.a.
$375 p.a.
Receive a complimentary Virgin Australia return Economy domestic flight each anniversary year and complimentary travel insurance.
ANZ Low Rate Platinum
0% p.a. for 16 months with 2% balance transfer fee
11.49% p.a.
$99 p.a.
A platinum card with a competitive low rate and a range of complimentary insurances.
Woolworths Everyday Platinum Credit Card
0% p.a. for 14 months
19.99% p.a.
$0 p.a. annual fee for the first year ($49 p.a. thereafter)
Receive a $100 eGift Card when you apply by 30 June 2017 and make an eligible purchase by 31 July 2017.

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Prevention is better than a cure

The next time you're thinking of going overseas, plan ahead. If you're going to use a credit card to pay for your flights, accommodation or even spending money, think about a card with 0% interest on purchases. This will give you a number of months in which you can spend on your card and then pay it off free of interest. If you still haven't paid your debt off in this time frame you could then try to apply for a balance transfer card.

If you're going to use your card for spending while overseas look for one which doesn't charge foreign transaction fees. This will help keep more money in your pocket, which is invaluable when you get home and need to pay off your debt.

Above all, if possible, budget for your holiday before you leave. If you manage to save up the money you need for your trip, you can take a debit card with no foreign transaction or ATM fees or a travel money card. This removes the temptation to spend - you literally won't have any money left if you go overboard with one of these cards.

Steer clear of being part of the one quarter of travellers who travel abroad without cover. An injury or sickness overseas can be extremely expensive, so this cover can protect you from bringing these kinds of debts back home.

Don't let a dream holiday turn into a debt nightmare. Follow the tips above and avoid getting into the vicious cycle that is debt-lag.

Elizabeth Barry

Elizabeth is a senior writer for finder.com.au specialising in personal finance. She enjoys reading PDSs so you don’t have to.

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