Are you bankrupt or struggling with debt? Here's how to weigh up whether a new credit card is the right move for you.
As of May 2016, the Australian Securities and Investment Commission (ASIC) reports that there is just under $32 billion in Australian credit card debt. This figure, shown on the MoneySmart credit card debt clock, translates into an average of $4,322.60 per cardholder and an average interest payment of $727.06 p.a. at interest rates between 15% and 20%. As for bankruptcies, the Australian Financial Security Authority reported a modest 1.5% rise in personal insolvencies in the last quarter of 2015, which means that bankruptcy isn’t exactly going down.
If you are struggling with debt or bankruptcy today, take comfort in knowing that you’re not alone. Here, we discuss your credit options during this time of personal financial crisis.
Should I get a credit card if I’m bankrupt or repaying a debt?
If you find yourself in a persistent position of debt, it may be worth reconsidering your credit limit. Increasing your access to instant credit with a new credit card may do more harm than help in the long run. You may have a good reason for needing to borrow money, but there are other options to consider:
Why you should
- Helps cash flow. Payments can be deferred until the end of the month, and you can pay things off in instalments.
- Rewards and cashback. You can collect frequent flyer or other reward points, and enjoy possible cashback incentives.
- In case of emergency. A credit card provides assurance that you have access to funds during an emergency.
- Rebuilds credit. Having a credit card gives you the opportunity to rebuild your credit rating if you make repayments responsibly.
- Balance transfer at a lower interest rate. Perhaps your new credit card has a promotional low interest rate that will buy you some time to repay existing debts.
Why you shouldn't
- Propensity to overspend. Spending more than you have will lead to even greater debt.
- Interest and late fees. You will incur high interest fees if you are unable to pay off your balances on time.
- False security. Regular use of a credit card can lull you into a false sense of having enough. If you don’t have the cash to back up your credit card expenditure, you could very quickly find yourself in a worse state of debt.
- Rejection can further hurt your credit. Your credit card applications will result in an even lower credit score if they are rejected, because the hard enquiries made by these lenders will stay on your credit report for five years.
Alternatives if I’m bankrupt or repaying a debt
Payment defaults and bankruptcy are among the items on your credit report that could seriously hurt a credit card application. Instead of going down that route, perhaps a wiser move would be to consider your other credit options. Here are some alternatives you may find helpful:
- Personal loans. Some providers may be willing to lend you money despite your bad credit history.
- Cash advance loans. Also known as payday loans or bad credit loans, these are short-term loans of up to $2,000 with fixed fees.
- Bank overdrafts. You may be able to get a personal overdraft from the bank because of your long banking history with them.
- Debit card. Using a debit card instead of a credit card will ensure that you only spend money you have, which can help you work your way out of debt.
- Low income credit card. If you meet the low income requirement, you could consider applying for a low income credit card with lower fees and interest rates. A credit check would still apply in most cases though.
- Joint account credit card. Another way to get a credit card would be to apply for a joint account credit card with someone that has good credit history. They would be the primary applicant, but you could share their account.
Mistakes to avoid
- Making too many applications. While you may be concerned that your first application will not be approved, resist the urge to apply for too many credit cards or loans. Each application results in a hard enquiry on your credit file, which results in more points deducted from your credit score. Future lenders may also interpret your numerous attempts to obtain credit as an act of desperation and poor management of resources.
- Overspending. Your spending habits probably needs to be reined in, and having too much credit on hand certainly doesn’t help. Consider lowering your credit limit instead, and take care to pay down your balances as quickly as possible.
- Incurring more debt. Having one more credit card increases your likelihood of incurring even more debt. Take care to pay off your balance so that you aren’t racking up interest fees as well.
Ultimately, your chances of getting a credit card depends on how long ago you experienced financial hardship and what your credit rating looks like now. The longer you can wait to apply for new credit, the better your chances will be of getting your application approved. If you’re still struggling to repay your debts, credit card issuers are not likely to extend more credit to you, and you’d be better off considering your alternatives and working on repaying those debts first..Back to top