Are you being smart with debt this Xmas?

Xmas can be a trying time when it comes to paying bills – expenses like presents, travel and Xmas dinners can really put stress on finances. The last few years of financial uncertainty have seen an attitude shift among New Zealanders towards debt and the country has been experiencing its first positive savings rate in over a decade. But during times of financial pressure, like Xmas, turning to credit can seem like an easy option but it can often be dumb debt.

Current trends in Kiwis’ dumb debt

• Consumer debt has been decreasing since December 2008, when it reached a peak of $12.6 billion. Since, total consumer debt has decreased by $1 billion and now stands at $11.6 billion (as at August 2011); and has decreased by 1.2% over the past year.
• Of the total current consumer debt, $5.1 billion (as at August 2011) comes from balances outstanding on personal credit cards.
• Of the $5.1 billion in credit card debt, $3.5 billion (69%) is interest bearing, and carries an average interest rate of 17.8%. Over the course of a year that outstanding balance will cost those cardholders $623 million in interest.
• The current savings rate is estimated at 1.9%, which means that for every $100 Kiwis earn they are saving almost $2, recently only becoming positive for the first time since the early 90s.

What is the real cost of Xmas dumb debt?

The cost of $500 Xmas groceries, paid for on a credit card with an interest rate of 18% at different repayment levels:

Table 1 – Source: Sorted Credit card calculator. Figures rounded to the nearest dollar.

$1000 worth of hire purchase with an interest rate of 25%, start up fees of $50, including an interest-free period of six months, repaid over different time periods:

Table 2 – Source: Sorted Hire purchase calculator. Figures rounded to the nearest.

To work out other repayment times and interest amounts on dumb debt go to www.sorted.org.nz/calculators.