Can Australia handle 2023 without turning to credit cards?

In an era characterised by rising prices and stagnant wages, an increasing number of Australians are turning to credit cards as a financial solution. In fact, as of April 2023, our nation has racked up a credit card debt of $17.76 billion. Debt accruing interest is up $27 million from March, and 2.5 per cent higher than April 2022 - proving that a lot more Australians are relying on credit in today’s cost-of-living crisis. 

But should we? How are our credit card debts affecting our financial health? And what can we do about getting our finances back in the black, and keeping them there?

Theoretically, credit cards are beneficial if you don’t have the funds to pay for something right now, because you can pay them back later. When used responsibly, they can help you build a credit score, earn rewards like cheap flights and discounts at selected retailers, and even get you cash back.

But considering that credit cards come with interest, relying too heavily on them could put you at risk of getting trapped in a debt spiral – a vicious cycle where the interest charges are growing faster than you can afford to pay them off. 

To put this in perspective, in May 2023 RateCity research calculated that assuming an average credit card interest rate 17.64% at the time, Australians would have paid $256.7 million in interest charges alone on their $17.73 billion credit card debt. 

That’s $8.6 million per day going into the pockets of credit card providers - money that could otherwise be used to pay for food, housing, and otherwise covering the rising cost of living. 

Failing to make credit card repayments on time can also put a red mark on your credit report and hinder your credit score, which can make it harder to achieve future financial goals such as securing a home loan.

Ultimately, while credit cards can be very useful under the right circumstances, when not used carefully they can cause more harm than good.

It’s also worth noting that credit cards also aren’t as essential as they used to be. In the past, credit cards were necessary for certain transactions such as booking hotels, renting cars and shopping online - but not anymore. Now, you can often make these purchases with debit cards, PayPal or even old-fashioned bank transfers. If you don’t need to rely on a credit card to get the goods or services you’re after, you may be able to avoid them altogether.

If you want to wean yourself off credit cards, or to avoid using them altogether, there are multiple options to help you in your endeavour.

As the name suggests, BNPL involves buying something now and paying for it later, in a series of instalments. Generally, you’ll need to make a portion of the payment at the time of purchase before paying the rest off bit by bit.

Unlike credit cards, BNPL doesn’t charge you interest on your outstanding balances. The most significant costs you may face are late or dishonoured payment fees. Eligibility requirements are also generally narrower, with the key criteria being that you are over 18 years of age. BNPL is also typically credit-check free.

But remember - while BNPL may be useful for small purchases, it’s still effectively a form of credit and must be handled with care. In fact, the Australian government is looking at increasing regulation of the BNPL sector to treat it more like other credit products.

Payday loans allow you to borrow a set amount of money on the condition that you will pay it back when you get paid, usually within a 24-hour period.

While payday loans can get you out of a tight spot by giving you access to money fast, the fees associated with them are often very expensive compared to the size of the loan. For this reason, you may only want to consider using them for emergency purposes, such as medical treatment, or home or car repairs, and only after all other lending options have been exhausted.

Personal loans generally have lower values and shorter terms than mortgages, making them useful for bigger purchases like a holiday, buying a car, renovations, or a wedding.

The interest rate is often lower than a credit card’s, and can be fixed for the term of your loan, unlike credit cards which have a rate that can change at any time. However, personal loans are generally less flexible and may have more eligibility hoops to jump through, such as providing an asset as security.

An overdraft is another option when you’re running low on cash. This allows you to withdraw an agreed amount of money from your account if the balance goes negative, intended to cover you until your next paycheck. You need to apply for overdraft in advance, but once approved you’ll be able to use it at a moment’s notice.

Personal overdrafts are short-term solutions, and it’s important to note that interest rates on these transactions can be high when you compare overdrafts to personal loans.

Lay-by might feel like a thing of the past, but it’s still available in some businesses today. Finding retailers that offer this service will allow you to pay your purchases off gradually, rather than putting them on a credit card that will accrue interest over time.

Unlike BNPL, lay-by is offered by individual businesses, so it’s much harder to get yourself into an unmanageable amount of debt.

While not a financial product, another alternative to using a credit card is creating and sticking to a strict budget. It may sound obvious, but a lot of people resort to a credit card because they don’t really think about where their money is going week to week. Keeping careful track of where every dollar goes could help you stretch your finances further.

A strategy that may help you stick to your budget is using cash or prepaid credit cards. Although it has ‘credit’ in its name, prepaid credit cards are more like debit cards that are preloaded with money, instead of linked to a bank account. They can help prevent overspending because they come with a cap. Bear in mind that while prepaid cards don’t charge interest, in some cases they do charge a fee, which can add to the cost of using the card. They also may not be accepted everywhere - it depends on the business you’re buying from.

Saving is also an essential part of saying goodbye to a credit card. Some strategies to help you save include moving your money into different bank accounts to split your savings from your spending; physically putting cash aside for certain savings goals; and creating an emergency fund to help you cover any unexpected expenses that crop up.

Many people keep a credit card for the sole purpose of having rewards points. While points can be appealing, often the cost of keeping the card outweighs the value of the rewards you’re getting. Instead of racking up credit card reward points, you can always register for other rewards programs that don’t require you to go into debt. Major supermarket chains, and many other businesses, offer rewards programs that can score you savings.

If you use a credit card, obviously you don’t want to miss your repayments, and neither do your lenders. Rather than risking defaulting, you can contact your creditors and utility providers to organise an alternative payment arrangement. This might involve stopping interest charges for a period, or changing your payment plan to something more affordable.

If you’re struggling to pay back debts that keep piling up, there is always help available. Some organisations that can help get you back on a financially fit path include Good Shepherd and the National Debt Helpline. Remember, you can also speak to a financial advisor about your situation.

In today’s cost-of-living crisis, it’s understandable that Australians are reaching for their credit cards more and more. While credit cards can solve financial problems temporarily, they have the potential to cause trouble down the track if not handled with care. 

Don’t let your credit card turn from a convenience into a burden on your back. It’s important to use credit cards with caution, and to explore alternative ways to pay that help you avoid the debt spirals credit cards can cause.