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Debt lag: How to deal with debt after a holiday
Stuck with credit card or loan debt after a holiday? Here's how to deal with "debt lag".
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Many Australians use credit cards or personal loans to pay for trips away. Whether it's just for part of the trip, like the accommodation or the flights, or the whole holiday, sometimes you just need a little bit of extra cash to fund your vacation.
But what happens when you return home and you have to repay your credit card or loan debt? 2019 research by credit bureau Experian revealed that three out of five Australians took between one month and two years to pay off their holiday credit card 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's in this guide?
What is "debt lag"?
Debt lag is any debt that you've accrued while paying for a trip away. And while jet lag tends to go away after a few days, debt lag can really stick around, if you let it.
Debt lag can be money you charged to your credit card before you left, for things such as flights or pre-booked accommodation, or it could be a personal loan you took out to pay for things while you were away.
Why is debt lag so common?
Many people rely on products like credit cards and personal loans for travel and can go into debt even when they didn't plan to. Here's what is contributing to the debt lag problem:
Credit cards used for spending overseas
Many credit cards offer overseas travel-spending features such as $0 foreign currency fees and $0 overseas ATM fees. Because of this, people tend to spend on their credit card, rather than their debit card while abroad. This ultimately can be dangerous, as it means people are not restricted by what they have available in their bank account, only by their credit limit. It's important to repay what you spend on your 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 more money, which ends up keeping you in a debt trap.
I have travel debt, what do I do?
If you've returned from a holiday with debt, there are a number of things you can do to repay it sooner. Here are some of your options:
Pay more than your minimum credit card repayments
Credit cards have a minimum repayment amount that you're required to make each month, usually 2% of the total amount you owe. 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 reduce the amount of interest you're paying overall and t0 get the debt repaid as quickly as possible.
Make extra or lump sum repayments towards your personal loan
Personal loans also have a minimum repayment amount, but unlike credit cards, this will ensure that your debt is repaid within the loan term. However, you can pay your loan off sooner than this if you make additional repayments towards your loan. Just make sure you won't be charged a penalty for doing so or for repaying your loan ahead of schedule.
Take out a 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 all of your debt to a new low interest loan so you can 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.
Use a balance transfer credit card
If you have debts spread across multiple credit cards, consider applying for a balance transfer credit card. This will enable you to consolidate all of your credit card debts into one account and 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 onto a new balance transfer credit card and then repaying that debt at 0% p.a. for a set period, usually between 6 and 24 months. Make sure you'll be able to repay the debt within this period of time 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 going 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 your trip, then why not book further in advance? Work out how long you would need to repay the cost of your purchase and make your bookings that far in advance (you may even find better deals to reward your forward planning!). Then, when the time of your trip comes around, you'll be debt-free!
- Consider layby travel options. There are many ways that you can "layby" travel. Companies let you select your travel option, put down a deposit and pay for it in full at a later date. This is a good option to consider if you can save up for the trip over time and will be able to repay it before you go.
- Rely on travel debit cards rather than credit cards. Many travel debit and prepaid cards offer many similar features to travel credit cards, including no foreign currency fees and $0 ATM withdrawals. Some even let you earn reward points.
Compare your options to deal with debt lag
Mandy’s Mauritian debt lag
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 on 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. By the time her debt is paid off, her total interest bill is $313.53.
Let's look at how much interest would be charged on different balances over different periods of time:
| Credit card debt | 3-month repayment period | 6-month repayment period | 12-month repayment period |
| $1,000 | $29.64 | $52.25 | $98.45 |
| $2,000 | $59.29 | $104.51 | $196.89 |
| $5,000 | $148.22 | $261.27 | $492.24 |
| $10,000 | $296.44 | $522.55 | $984.47 |
Source: Credit Card Finder, calculations using average credit card interest rate of 17.7% p.a.
Avoid debt lag in future with a staycation
If you're looking for ways to avoid debt lag in the future, you may want to consider a staycation. There are numerous reasons that a staycation can be as worthwhile as a vacation abroad. You can still relax, take time off work, look into what tourist attractions are in your area, pack a day bag and go out exploring. You may find some gems that you didn't even know about, right on your doorstep.
Taking a staycation can save you money on travel, accommodation and expensive trips out. And, you can still treat yourself to a cheeky shopping trip or a bottle of bubbly, while also saving yourself thousands.
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