Credit cards can be very useful, especially at this time of year.
But if you are not careful they can also be a huge trap.
You need to make sure you resist the temptation to only make the minimum monthly payment. That is because if you only make the minimum payment you will pay interest on the debt every month.
The card companies typically charge between 18 - 20 percent interest.
If you only make the minimum monthly payment you will find that it takes you years to repay your debt and it will cost you hundreds or even thousands of dollars more.
The banks and credit card companies typically require a minimum monthly repayment amount of between 2 to 5 percent of your balance, or 5 to 25 dollars per month - whichever amount is the greater.
The trouble is that a 2 percent repayment amount is going to ultimately cost you more than a 5 percent repayment amount.
Ideally, you would pay the full balance each month and you would be charged no interest. You might even earn some rewards.
Here is one example from the sorted.org.nz website
If you owed $1,000 and repaid 25 dollars each month you would ultimately pay $539 in interest. It would take just over 5 years to repay the total amount of $1,539.
That's a conservative sum. With some cards your repayment period would climb to over ten years and your repayment costs would be even higher.
TALK TO YOUR BANK
If you are already struggling, or have other debts (car loan, personal loan, hire purchase) you need to get some advice. Everyone's situation is different. But options include a consolidated loan at the lowest interest rate possible.
If you have more than one credit card you should pay off the one with the highest interest rate first.
WHY ARE THE INTEREST RATES HIGH?
The interest rates on credit cards are much higher than you would pay for a mortgage.
The banks say that is because a credit card loan is unsecured and so they are taking on a bigger level of risk.
If you fail to make the repayments on your mortgage the bank could sell your house. They cannot do that with a credit card loan.
Over half of all New Zealand credit card customers pay off the full amount each month. Two to three percent make the minimum payment and everyone else falls somewhere in between.
The Commission for Financial Capability is hoping that by 2025, 70 percent of New Zealanders will be repaying the full amount each month.
Watch the video for the full Talk Money segment.