# Risk 50 years of debt with min credit card repayments

Kiwis who only make minimum repayments on a \$10,000 credit card bill will take more than 50 years to finally clear the debt, Canstar research reveals.

Canstar has analysed the rate it would take a New Zealand credit cardholder to clear \$10,000 worth of debt, split across a credit card (\$7000 debt) and a rewards credit card (\$3000).

Based on the average interest rates as at 24 November 2017 (16.05% for a credit card and 20.07% for a rewards credit card), it would take over 50 years to pay off the debt (15 years and 10 months for the credit card, 54 years and two months for rewards credit card).

However, by the end of the 54-year period, the \$10,000 debt has more than doubled to almost
\$26,0000 (\$25,876.03) taking into account the total interest and fees paid (\$6135.02 for a standard credit card, \$19,741.01 for the rewards credit card). The calculations also include the annual credit card fees of \$37.50 for the standard credit card and \$151.00 for the rewards credit card.

If, for example, a 30-year-old only makes the minimum repayments, they would be 84 by the time they paid off both cards, based on these figures.

## Credit card statements must carry warnings

In June 2015, the Credit Contracts and Consumer Finance Amendment Act was updated to include a clause around credit card statements. All statements must now have a warning that if borrowers only make the minimum repayments, they will end up spending more to clear the debt.

Have a look at what happens to the debt if you only make the minimum repayments, according to rates as at 24 November 2017:

Credit card (no rewards) (credit card with rewards)
Amount owing \$7000 \$3000
Interest rate 16.05% 20.07%
Annual fee \$37.50 \$151.00
Minimum repayment (month one) \$213.95 \$96.11
Time to repay 15 years 10 months 54 years 2 months
Total interest and fees paid \$6135.02 \$19,741.01

These figures are based on the concept that the cardholder only ever makes the minimum repayments. So, if the credit cardholder makes any extra repayments, this would reduce the figures. Canstar has calculated the minimum repayments using the greater of \$25.00 or 3%.

However, anyone who only scratches the surface of their debt, will be well into old-age before they kiss goodbye to their credit card bill.

## Debt consolidation loans offer lower interest rates and costs

While managing credit card debt to begin with is always key advice, this won’t help if you have already racked up the credit card debt.

The other option to consider with debt on multiple credit cards is to consider a debt consolidation loan, known as an unsecured loan.

Unsecured loans are when the provider lends money without taking security, but issues the loan based on its assessment of the borrower’s ability to make repayments.

Canstar’s research shows credit card holders can knock off the debt in as few as three years with a debt consolidation loan (51 years less than paying off both credit cards separately with minimum repayments) and save almost \$24,000 (\$23,727.88) in the process.

In 2017, Canstar analysed 23 unsecured loans across 10 providers for its personal loans star ratings. Out of those rated, Harmoney, NZCU Baywide and The Co-operative Bank – received five-star ratings based on the costs and features available with their highest performing loans.

Canstar crunched the numbers to see the impact it would have if credit card holders consolidated their debt into one unsecured loan, based on the average rates and fees across the five-star products. Figures are based on a three-year unsecured loan of \$10,000 with interest rates as at 27/11/17.

Unsecured personal loan Average across Canstar five-star unsecured personal loans
Interest rate 10.97%
Upfront costs \$350.00
Monthly repayments \$327.25
Total interest and fees paid \$2148.15

In this scenario, a debt consolidation loan would slash the number of years spent in debt, as well as the total cost.

When it comes to debt consolidation loans, though, it still pays to do the research. Before signing on the dotted line, there are some conditions to watch out for.

The citizens advice bureau offers some top tips on what to consider with debt consolidation loans:

• Try to keep your repayment period short. Otherwise, you may end up paying a lot more in interest charges, even if you have smaller repayment amounts.
• Get advice on the consolidation loan contract from someone other than the lender, before you sign the contract.
• Check that you can afford the repayments.
• Check for any other fees that may be charged by the provider.

Canstar’s research includes the amount of upfront costs, as well as the monthly repayments, to help with comparing what is available in the unsecured personal loan market.