Managing Credit Card Debt on Parental Leave
As new parents, there are a lot of quotidians we’d all like to sweep under the carpet - full nappies, piles of laundry and credit card debt.
It feels like they pile up as soon as you turn your back. And that’s certainly the case with money owing on your credit card - those interest payments add up fast.
So in this article, we’re going to double down on credit card debt. We will cover other forms of debt management like mortgages and buy now pay later too, but given that 41% of Kiwis have credit card debt (Finder) and Consumer NZ rates it as a top financial concern, it’s important we crack this together first.
If you’re reading this article, then chances are, you’re part of this 41%. Take heart in knowing you’re not the only one, and that there are steps you can take to manage it and improve your financial position.
Step 1: Know what you owe
This week, schedule half an hour to go through your most recent credit card statements and write down three key things:
The minimum monthly payment for each card (since this can affect your credit score; it’s typically found at the top of your credit card statement)
How much money you owe on each credit card (so you can game plan how to pay it off)
The interest rates you are paying (this determines how quickly additional fees will grow; it’s typically found at the bottom of your credit card statement)
Step 2: Minimum payments can cause maximum headache
The first rule of thumb is that it’s best to pay at least the minimum payment each month for each credit card. If you don’t pay the minimum payment, it can:
Negatively affect your credit score. This makes it more expensive for you to borrow in the future and could affect your ability to get a mortgage (you can learn more about your credit rating here)
Lead to paying late fees (which are additional fees - usually around $20 - if you haven’t made the minimum monthly payment by the due date)
Result in higher interest charges on your credit card, as the interest each month is calculated on the outstanding balance
To illustrate how paying only the minimum payment can lead to a debt trap with credit cards, a friend kindly shared this snippet from her recent credit card statement. She has $7,600 outstanding and her bank charges 20.24% interest. You can see that by sticking to the minimum payment, It would take over 80 years to pay off the credit card, and lead to over $50,000 in interest charges.
Source: sample of a credit card statement from the Commonwealth Bank of Australia
Step 3: What repayments should you make each month?
Once you have a clear idea of what you owe, you need a plan to eat away at the debt, while steering clear of high interest rates.
Put money aside each payday
If you haven’t started parental leave yet, use every payday that you can to eat away at your debt. Decide now how much you can commit to and remember to make sure it’s above the minimum payment for each card. Then, figure out how long it will take you to pay off using this Debt Repayment Calculator.
For example (using the calculator above), if you have $1,000 on your credit card with a 20% interest rate and can:
Afford to make monthly repayments of $200, it will take 6 months to pay off the card, and you will pay an additional $53 in interest
Afford to make monthly repayments of $80, it will take 15 months to pay off the card, and you will pay an additional $131 in interest
High interest rate = high priority
Prioritise credit card payments with higher interest rates (if you have more than one credit card), so you can shrink the extra interest charges.
It may also make sense for you to roll all your high-interest loans into one, a strategy referred to as debt consolidation. You can find out more about the pros and cons of this approach here.
Step 4: What to do if paying debt isn’t an option right now
We’re not fans of kicking the can down the road, but when you’re on parental leave your income can take a hit. There are still things you can do to improve your overall financial position.
Consider a Balance Transfer Credit Card
This means you transfer your existing credit card balance to a new bank and pay 0% or low interest for anywhere from 3 to 24 months. You will still have to pay minimum monthly repayments.
The benefit of this tactic is not having credit card interest piling up during parental leave. But the low-interest period won’t last long. To avoid a big jump up in interest charges, you’ll need to make a plan to pay off as much of the balance as possible before the low-interest period ends.
If a Balance Transfer seems like the right approach for your family, you can find out more here.
Key Takeaways
Pay more than the minimum payment for each credit card whenever possible
Make a plan to pay off credit cards by choosing regular payments that suit your family and then use a Debt Repayment Calculator to find out how long it will take to pay
If you’re not in a financial position to pay off the credit cards, look into a Balance Transfer Credit Card to give yourself some breathing room from interest charges
And finally, a reminder to go easy on yourself. Every article relating to parenting should come with this reminder. With debt, it’s particularly important. Reading this article is your first proactive step toward managing it and getting on top of your finances. Just make sure you now circle back to the top and book in that half hour!
Now for the important legal part: The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 28 June 2022.
About Adya Goswami
Adya Goswami is dedicated to helping adults and kids become more financially savvy.
She’s using her years of experience in retail and investment banks, start-ups and education to help people make small habit shifts that lead to big changes in the long term.
