The Best 'Investment'

By Mary Holm

Monday 25th September 2000

Christmas is just three months away, and the more organised amongst us are already thinking about shopping for gifts.

If you're one of the many who tend to spend more than you can afford and charge the gifts on your credit card - and then find you can't pay the credit card bills - think hard before you do it again this year.

One of the best "investments" anyone can make is to pay off credit card debt, and vow to never let it mount up again.

Last Christmas, shoppers spent 22 per cent more on their credit cards than the year before. That's a huge rise.

It would be fine if everyone paid their credit card bills by the due date, so they didn't have to pay any interest.

People who use their cards that way - getting the free use of credit and sometimes building up customer loyalty points in the process - are gaining.

But too few are like that. According to a recent Reserve Bank paper, "About one quarter of credit card borrowing is not subject to an interest rate charge, being the 'float' during the 'free credit' period."

A quarter. That's pathetic.

It means three quarters are paying interest, often at close to 20 per cent. A few years of that, and you'll be considerably worse off than you otherwise would be.

On a more hopeful note, the paper shows that credit card debt in proportion to total household debts fell slightly in the 1990s. And hire purchase loans [dash] which also tend to come with pretty high interest [dash] fell sharply in proportion to total debt. Clearly, high-interest debt is not as predominant as in the past.

A major reason for this, says the paper, is "the ease with which loans secured on mortgages can be accessed and re-accessed."

In other words, people are paying off hire purchase and credit card debt by borrowing more on their mortgages.

This is a pretty good idea. In most cases, interest rates on mortgages are much lower.

If you have hire purchase or credit card debt that you don't imagine you'll repay in the next month or so, talk to your mortgage lender about consolidating all your debts into your mortgage.

One problem with that, though, is that it transfers short-term debt into long-term debt. You may find you've now got 20 years to pay off what was the credit card money.

Required payments will be relatively low each month. But, because the loan is outstanding for a long time, you could end up paying lots of interest over the period.

The way to get around this: Make bigger mortgage payments than you have to.

It would be even better, though, if you forget about the mortgage and simply pay off your highinterest debts altogether.

Paying off an 18 per cent credit card debt improves your financial situation as much as earning 18 per cent after tax on an investment. And it's risk-free.

You'll never get as good a deal again.

Follow-up to my column two weeks ago:

A reader writes: "Your article suggests that you can invest in Department of Work and Income! Some further explanation is suggested in a further article. It is presumed that you mean WiNZ on the NZ Stock Exchange."

I certainly do mean AMP's world index fund, which invests in global shares. That WiNZ is spelt with a small "i", but the names are horribly confusing.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

Comments from our readers

No comments yet