Smart ways to start paying off your Christmas debt

As the festive season begins to fade out for another year, plenty of Aussies will be starting to reckon with just how much they spent, especially the close to two in five who, according to a survey conducted by Finder, ran up debt over Christmas.

Of course, some people will simply be able to pay off any debt they are carrying, but for others it will be a more pressing concern.

For those looking to get their debt under control, ASIC's Moneysmart recommends putting a plan in action right away starting with working out how much is owed.

From there it may be a matter of reaching out for help if needed, cutting back on spending or prioritising the debt from the most expensive to least expensive.

Some may even be eyeing off a balance transfer credit card or debt consolidation loan as a way to reorganise their debt and reduce the interest they're paying on it.

But can these products be useful for tackling debt, or are they more trouble than they're worth? Here's a look at the benefits and drawbacks of both.

How do balance transfers work?

In October, Australians had a combined credit card balance accruing interest of $18.68 billion, according to Reserve Bank data. This figure has actually declined over the past decade, but it's still substantial - especially when you consider that many cards have interest rates in the 15-25% range.

It's high interest rates that can make paying off even a relatively small amount of credit card debt tricky, and it's why some credit card holders turn to balance transfers for help.

"A balance transfer lets you transfer your credit card debt to a new card and pay it off without paying any interest instead of the typical 20% rate," explains Angus Kidman, personal finance expert at Finder.

"So the real benefit is that you have the chance to pay off your debt without the debt increasing. Say you've transferred across $10,000, you could pay off $500 every month so that in 20 months you will have paid it off without accruing more interest."

A balance transfer credit card won't be the right fit for everyone though. According to Kidman, a certain amount of discipline is required for them to be an effective part of debt management.

"It's only going to work if you focus on paying off the debt," he says.

"You have to have the mentality that this isn't a new credit card to spend with, it's a way of getting your finances under control, because most of the time the 0% interest rate only applies to the transferred balance, not new purchases."

Beyond how they should be used, Kidman says it's also important to compare different balance transfer offers because no two cards are going to be alike.

"Balance transfers come with different interest-free periods. Some of the shorter ones are 12 months while the longer ones we've seen in recent years can go up to 32 months.

"A lot of balance transfers also have a one-time balance transfer fee - usually 1% or 1.5% of the balance. Even with that it's still probably going to be a lot cheaper than the 20% interest you're paying on that balance already, but it is something to be aware of."

What is a debt consolidation loan?

Debt consolidation loans are another product some Australians utilise to manage their debt, but unlike balance transfer credit cards they can be used for different types of debt and there will be an interest rate involved.

"Debt consolidation is where you consolidate all your high interest debt into one low-interest loan. It is a good strategy if it's done well, but you need to think it through and be disciplined about it," says David Koch, economic director at Compare the Market.

Imagine, for instance, that you have $5000 worth of debt with a car loan and $4000 worth of debt spread across two credit cards.

Each is likely to have a different interest rate and repayment schedule, so by consolidating them into a $9000 personal loan with a single, lower rate it could be possible to simplify and reduce your interest payments. It may also be possible to consolidate other debts into a mortgage.

Like balance transfers, there are a few things to consider before going down the debt consolidation route though.

"Even if you think you can wing a better rate, if your lender extends the loan term, you may pay more in the long run," says Koch.

"For example, rolling a high-interest credit card debt into a low-interest home loan is sensible. Except if you turn that short-term, high-rate loan into a 30-year-long term low-interest loan. In the end, you'll pay more in interest.

"The key is rolling that credit card balance into the home loan and then setting a strict time frame to pay the extra off the mortgage, even by using the credit card interest you've saved on the switch."

Four tips for balance transfer and debt consolidation success

1. Compare card features: "The best value balance transfer deal is probably going to be one that doesn't charge a transfer fee, but you also need to look at the interest-free period, any annual fee and all the other usual features and terms and conditions involved," says Kidman.
2. Choose the right repayment schedule: "Make sure the repayment terms and schedules align with your personal circumstances. For example, if you get paid on Tuesday, schedule the loan repayments for Wednesday or Thursday, so you mitigate any risk of paying late fees and further interest," Koch says.
3. Consider the timeframe carefully: "Longer interest-free periods obviously give you more time to pay off the debt you transfer, but the faster you can comfortably pay it off, the better it will be for your long-term financial health," says Kidman.
4. Reach out for support: "If you are up to your eyeballs in debt, it could be time to speak to a professional or talk to your bank or lender about hardship programs, payment plans and payment extensions," Koch says.

To speak to a financial counsellor online visit the National Debt Helpline website or call the National Debt Helpline on 1800 007 007. Alternatively, head over to ASIC Moneysmart's financial counselling portal for further financial counselling options and to find a financial counsellor in your area.

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