Dumb debt - that's how the Retirement Commission describes it when we pay high interest that could easily be avoided.
Using credit to pay for holiday-season expenses may seem like a good idea at the time, its Sorted website says. But if you're not in a position to pay it back quickly, you could be left with a "dumb-debt hangover" that last months or even years.
Sorted gives the example of someone spending $1500 on a credit card with an interest rate of 19.5%. The initial minimum repayment would be about $30 per month.
If you continued to pay $30 a month, it would take more than eight years to pay off the balance.
And the total amount of interest you would pay - on top of the original $1500 you owed - would be more than $1600.
But it's not only at Christmas that high-interest debt is a problem.
The experts say people often get caught with stores offering extended interest-free periods, not realising they will be charged interest if they have not paid the balance in full by the end of the term.
Others defer payments for a few years, then something unexpected, such as losing their job or having to help a family member, happens and they cannot make the repayments.
The interest rates on store cards or the "line of credit cards" offered by finance companies can be high and there are often large establishment fees and insurance to pay.
Some of them allow the finance company to repossess everything you ever bought with the card if you get behind on payments.
Sorted says people should explore cheaper options, such as family members, banks and credit unions, before resorting to third-tier lenders charging high interest rates.
Many lenders will charge a fee for varying the repayment terms and if you fail to pay on time, you'll be charged default fees, Sorted says. If those fees are all rolled into the loan, you will pay interest on them, "which is a real sting in the tail".
Consumers planning a purchase need to ask themselves if they really need the item and if they do, what is the best way to pay for it, the agencies say.
Wherever possible, avoid taking out a loan. If you do, ensure you know the total amount you will pay back, including the principal, interest and fees. Know the risks if your home or household goods are used as security. And take the paperwork to someone such as a budget adviser or community law centre before signing.
"Anybody borrowing money from anyone needs to have a clear budget, know how much money they have available for repayments, and stick with that amount," says Shirley Woodrow, of the Dunedin Budget Advisory Service.
"And if people are struggling, they should seek help. Our service is free and confidential and we look at the options from an objective point of view."
Resources:
• Calculate the total interest you'll pay by the time you pay off a loan at sorted.org.nz/calculators/debt
• Compare interest rates online at interest.co.nz
• Get free budget advice from the NZ Federation of Family Budgeting Services on 0508 BUDGETLINE (0508 283-438) or the Dunedin Budget Advisory Service on 471-6158.
