Stuck with credit card or loan debt after a holiday? Here's how to deal with your "debt lag".
Many Australians use credit cards or loans to pay for trips away, whether it's just for a part of it, such as accommodation or flights, or even the whole trip! But what happens when you return home and you have to repay the credit card or loan debt? To make sure your holiday debt doesn't stay with you for years to come, we'll show you how to deal with your holiday debt lag.
What is "debt lag"?
Debt lag is any debt that you've accrued paying for a trip away. This can be money you charged to your credit card before you went, such as flights or pre-booked accommodation, or even a personal loan you took out before you went to pay for the trip.
Why is debt lag so common?
Many people rely on products like credit cards and personal loans for travel and can get into debt even when they don't plan to. Here is what is contributing to the debt lag problem:
- Credit cards are used for spending overseas. Many credit cards offer overseas travel-spending features such as $0 foreign currency fees and $0 overseas AM fees. Because of this, people spend on their credit card and are not restricted by what they have available in their bank accounts, only their credit limit. It's important to repay what you spend on a travel credit card as quickly as you can.
- Personal loans for travel. If you take out an unsecured personal loan for travel you are spending money that you don't currently have. Unless you have a plan to repay it soon after your return, you could be repaying that debt over the next few years. This will limit your ability to save and take future trips within that period unless you borrow money for it again, keeping you in a debt trap.
I have travel debt, what do I do?
If you've returned from a holiday and have leftover debt, there are a number of things you can do to repay it sooner. Here are some of your options:
- Make more than your minimum credit card repayments. Each credit card has a minimum repayment that you're required to make each month, usually 2%. If you just make this minimum repayment it will take you a long time to repay your debt. Pay as much as you can towards your credit card to ensure you're not getting charged too much interest and you can get the debt repaid as quickly as possible.
- Put extra or lump sum repayments towards your personal loan. Personal loans also have a minimum repayment but unlike credit cards, this will ensure your debt is repaid within the loan term. However, you can repay your loan off sooner if you make additional repayments towards your loan. Just make sure you won't be charged a penalty for doing this or for repaying your loan ahead of schedule.
- Debt consolidation personal loan. If you have multiple debts or you are paying a high interest rate on your personal loan, you may want to consider a debt consolidation personal loan. This will allow you to transfer your debt to a new loan and save on fees as well as interest. The key to a debt consolidation personal loan is to make sure the new loan is going to cost you less than what you are currently paying.
- Balance transfer credit card. If you have debts spread across multiple cards you can consider applying for a balance transfer credit card to repay them at 0% p.a. interest for a certain period of time. Balance transfer credit cards work by letting you combine debts from multiple credit cards in the new balance transfer credit card and then repaying that debt at 0% p.a. for a set period, usually between6-24 months. Make sure you'll be able to repay the debt in this period as the revert rate on these cards can be quiet high, around 20% p.a.
How can you avoid debt lag (before you go away)?
The easiest way to avoid debt lag is to make sure it doesn't happen in the first place. Here are some ways to avoid getting into debt over a holiday:
- Book your trip well in advance and repay it before you go. If you're planning on relying on credit for a trip, for example for your flights, then why not book further in advance? Work out how long you would need to repay the cost of your purchase and book that far in advance (you may even find better deals to reward your forward planning!). Then, when the time for your trip comes around you will be debt-free!
- Consider Layby travel options. There are many ways you can "layby" travel. Companies let you select your travel option, put down a deposit and pay at a later date. This can be an option to consider if you can save up for the trip over time and want to repay it before you go.
- Rely on travel debit cards rather than credit. Many travel debit and prepaid cards offer many similar features to travel credit cards, including no foreign currency fees and $0 ATM withdrawal. Some even let you earn rewards points.
Compare your options to deal with debt lag
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.