The pictures are enticing: ocean blues and hibiscus pinks; white beaches; nightclubs. For twenty-somethings, tropical holidays are rites of passage few can resist; fewer still can afford them – even if we think we can.
The Thailand package was only $500, but Simon, having just paid his car rego was broke so he decided to pay for it using his credit card. However, after adding airfares and travel insurance his credit was maxed out before the plane left the ground!
Simon’s situation is common. We easily justify using credit for things we know we shouldn’t. Temptation is cruel, often irresistible.
In Thailand, Simon had to pay for meals, activities, etc., using cash advances against his card. It didn’t take long before his card balance reached $4,000 and totally maxed!
Back home Simon was shocked into reading his card’s Ts & Cs. He learned that interest on cash advances is not only charged immediately but the rates are higher than normal interest – like 18% isn’t high enough!
Checking an online calculator at www.moneysmart.gov.au Simon estimated that by paying the monthly minimum amount, he would be paying off his card for more than two years. Additionally, over that time, he’d be charged over $700 interest. His holiday fun was quickly forgotten.
But it gets worse!
Life doesn’t play nicely and one month later Simon faced a dilemma: pay his card or pay his electricity bill. He had to make a choice.
You might forgive yourself for skipping a card payment but your bank won’t; on top of compounding interest, additional charges apply.
Simon was forced to do the unforgivable: he paid the minimum monthly amount, then used the same card to pay his electricity bill. The downward spiral began.
Once the spiral starts, it’s difficult to reverse. Simon needed to make friends with his credit card – fast!
A good friend had good advice
Simon’s travel buddy, Ben, had seen a financial adviser a year earlier and Ben had been able to pay for the Thailand trip from his savings. He asked Ben for the adviser’s number.
Seeing the financial adviser was surprisingly inexpensive. She worked with Simon, developing a budget to pay off the credit card asap. Pulling no punches, the adviser explained that the situation was dire – he must be disciplined and tighten his belt.
Within 12 months, he was in the clear. From there, Simon opened an online savings account that offered bonus interest when he made regular deposits.
Simon made friends with his card, learning that it could work well provided he remained in control.
When we lose control, debt is capable of punishing us mercilessly – for years.
A year later when Ben invited Simon on a ski trip to New Zealand, he agreed, comfortably knowing that he wouldn’t need credit to enjoy this holiday – and could create better memories.
Source: ASIC’s MoneySmart website www.moneysmart.gov.au Calculators