debt-lag

Debt Lag: How to deal with debt after a holiday

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 percent of Australians used their credit cards on their last trip and 48 percent 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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Rates last updated April 23rd, 2018
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Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Monthly Service Fee Application Fee Product Description Monthly Repayment
NAB Personal Loan Unsecured Fixed
11.99% (fixed)
12.87%
$5,000
1 to 7 years
$10
$150
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From 7.5% (fixed)
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2 to 5 years
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3% (of loan amount)
Based on your risk profile, you will receive a tailored rate between 7.5% and 20.49% with a SocietyOne personal loan.
Latitude Personal Loan (Unsecured)
From 13.99% (fixed)
15.19%
$3,000
2 to 7 years
$13
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An unsecured loan with a tailored rate from 13.99% p.a. to 29.99% p.a. designed for multiple purposes including renovating, buying a car or travelling.
MyState Unsecured Personal Loan
12.99% (variable)
16.42%
$3,000
1 to 7 years
$10
$200
Apply for up to $50,000 and make additional repayments at any time without penalty.
Westpac Unsecured Personal Loan
12.99% (fixed)
14.14%
$4,000
1 to 7 years
$12
$250
Borrow up to $50,000 for a term of up to 7 years with this unsecured loan.
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15.69% (variable)
16.55%
$5,000
1 to 7 years
$10
$150
An unsecured loan up to $55,000 that you can repay early without penalty.

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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 April 23rd, 2018
$
% p.a.

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Name Product Balance transfer rate (p.a.) Purchase rate (p.a.) Annual fee Amount Saved Product Description
NAB Low Fee Platinum Card - Exclusive Offer
0% p.a. for 25 months
19.74% p.a.
$90 p.a.
Ends 6 May 2018.
finder Exclusive: Take advantage of 0% p.a. interest for 25 months on balance transfers with no balance transfer fee.
HSBC Platinum Credit Card
0% p.a. for 22 months with 2% balance transfer fee
19.99% p.a.
$129 p.a.
Offers a 0% p.a. for 22 months balance transfer and an annual fee refund each year when you spend $6,000. Plus, complimentary travel insurance.
Westpac Low Rate Card
0% p.a. for 24 months with 2% balance transfer fee
13.49% p.a.
$59 p.a.
Offers a 0% for 24 month balance transfer option, up to 55 days interest-free on purchases and a competitve 13.49% p.a. purchase interest rate.
Virgin Money Low Rate Credit Card
0% p.a. for 14 months
11.99% p.a.
$49 p.a.
Offers a discounted annual fee, $100 cashback when you meet the spend requirement and up to 14 months on balance transfers. Ends 30 June 2018.
St.George Vertigo Platinum - Online Offer
0% p.a. for 24 months
12.74% p.a.
$99 p.a.
Platinum card benefits including complimentary insurance, plus 0% p.a. for 24 months on balance transfers (with no BT fee). Ends 30 April 2018.
HSBC Low Rate Credit Card
0% p.a. for 20 months with 2% balance transfer fee
13.25% p.a.
$79 p.a.
Receive up to 20 months interest-free on balance transfers with a 2% BT fee. Also enjoy exclusive offers with the home&Away Privilege Program.
Virgin Australia Velocity Flyer Card - Bonus Points 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 up to 60,000 bonus Velocity Points in the first 3 months and enjoy a discounted annual fee of $64 for the first year. Ends 30 June 2018.
St.George Vertigo Visa
0% p.a. for 18 months with 1% balance transfer fee
13.74% p.a.
$55 p.a.
Enjoy a 0% p.a. for 18 months balance transfer offer. Plus, up to 55 days interest-free on purchases.
Citi Simplicity Card
0% p.a. for 15 months with 1.5% balance transfer fee
19.99% p.a.
$0 p.a.
Save with 5% cashback on eligible purchases (capped at $50 per month) for the first 90 days from approval. Plus, a 15 month balance transfer offer.
Virgin Australia Velocity Flyer Card - Balance Transfer Offer
0% p.a. for 18 months
20.74% p.a.
$64 p.a. annual fee for the first year ($129 p.a. thereafter)
0% p.a. on balance transfers for up to 18 months. $64 in the first year ($129 p.a. thereafter), plus, bonus Velocity Points. Ends 30 June 2018.
St.George Rainbow Vertigo Visa
0% p.a. for 18 months with 1% balance transfer fee
13.74% p.a.
$55 p.a.
Available until 26 September 2018, all the great low cost features of the Vertigo Visa with a rainbow design in support of the LGBT community.
Citi Platinum Credit Card - 100k Bonus Points
0% p.a. for 15 months with 1% balance transfer fee
20.99% p.a.
$49 p.a. annual fee for the first year ($149 p.a. thereafter)
Earn 100,000 reward Points, enjoy a long-term balance transfer offer, a discounted first year annual fee and complimentary travel insurance.
Bank of Melbourne Vertigo Platinum
0% p.a. for 24 months with 1% balance transfer fee
12.74% p.a.
$99 p.a.
Offers a long-term balance transfer, low ongoing purchase rate, complimentary travel insurance and access to a 24/7 personal concierge service.
BankSA Vertigo Visa
0% p.a. for 18 months with 1% balance transfer fee
13.74% p.a.
$55 p.a.
Enjoy a 0% p.a. for 18 months balance transfer offer. Plus, up to 55 days interest-free on purchases.
Citi Rewards Platinum Credit Card
0% p.a. for 26 months with 2.5% balance transfer fee
20.99% p.a.
$49 p.a. annual fee for the first year ($149 p.a. thereafter)
Earn reward Points per $1 spent, take advantage of a 0% p.a. for 26 month balance transfer offer, plus complimentary international travel insurance.
NAB Low Fee Card
0% p.a. for 18 months with 2% balance transfer fee
19.74% p.a.
$30 p.a.
Receive complimentary purchase protection insurance, a 18 month balance transfer offer and special offers from Visa Entertainment.

Compare up to 4 providers

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 an editor for finder.com.au specialising in personal finance and fintech. She enjoys reading PDSs so you don’t have to.

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SocietyOne Unsecured Personal Loan

Based on your risk profile, you will receive a tailored rate between 7.5% and 20.49% with a SocietyOne personal loan.

Westpac Unsecured Personal Loan

Borrow up to $50,000 for a term of up to 7 years with this unsecured loan.

Pepper Money Unsecured Fixed Rate Personal Loan

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