“I use a credit card for everything – and I choose one of the ones which gives you money back” Frank Abagnale
A commonly held view is that money makes the world go around. In a society that continues to move towards being cashless, credit continues to emerge as a popular payment of choice with an array of products available in the market.
In theory the convenience and efficiency credit cards bring should make our lives easier however for many of us it’s a disaster waiting to happen. Whether it’s complex product terms and conditions, unclear fees or a lack of personal discipline it’s not surprising to learn that more of us are feeling the credit pinch than ever before.
According to Finder, in 2016 there were over 16.6 million credit cards in circulation within Australia resulting in spending of $51.7 billion. Scarily $32.4 billion of this was subject to accruing interest which makes for extremely lucrative business for the big banks and other financial institutions. Unfortunately whilst the banks are clear winners the average Australian finds themselves on the losing end, with increasing levels of debt and higher fees and charges part and parcel of managing the household finances.
Before you think we’re bashing the banks, we should highlight that what they’re doing is completely legal and by many measures acceptable by community standards. Like any other product or service they should be able to earn a fee for the product they’re providing. The counter argument to this is that complex products, unclear terms and conditions and in some cases hidden fees make it very difficult for the average punter to know exactly what value they’re getting for what they’re paying.
We’re huge advocates for credit cards when used in the right way and below we highlight a few things to be aware of and consider when looking at a new credit card or reviewing your current arrangements.
Know the cost
Don’t let the sheer volume of options or different products available in the market distract you from focusing on what’s important. Very few things in this world are free and when it comes to credit cards this is truer than ever.
There are two main fees you’ll want to keep an eye on when making your selection and another three to be aware of as you begin using a credit card.
Firstly there’ll be an annual fee. This can differ widely from as little as $0 for your vanilla options to $1200 for the more prestigious options available. Typically those with a $0 annual fee will have higher costs elsewhere such as the interest payable on purchases. Cards with higher annual fees are likely to have additional product features such as interest free periods, reward points, complimentary travel insurance and many more.
The other primary fee you’ll want to keep an eye on is the interest rate payable on purchases. This will usually range somewhere between 8% for low rate credit cards to 20% – or higher – for those at the other end of the spectrum. Typically there’ll be a converse relationship with the annual fee and your interest rate; the higher the annual fee the lower the interest rate and vice versa. Alternatively some products will give you a grace period for paying interest known as an interest free period. Generally this will range between 15 and 55 days and may result in a higher annual fee or interest rate.
Other fees you’ll want to avoid completely are late payment, cash advance and overdrawn limit fees. You can do this by ensuring you pay the minimum payment on time, avoid using your credit card to withdraw cash and ensuring you don’t purchase more than your approved limit.
If you’re on the hunt for a credit card or want to see if you can get a better deal your best bet would be to jump on a comparison site – such as Canstar – and find a card with a reasonable annual fee, interest rate and an interest free period.
Use it to your advantage
A financial institution won’t offer a product out of the goodness of their heart and you can be sure that there’s revenue driven reason any product or service they offer is in the market. Despite this, if used in the right way you can get the many benefits of having a credit card at a fraction of the cost.
The first way to do this is to pay off your account balance in full on-time every month. If there’s one recommendation we have it’s this as it will help you avoid the compounding cost of accrued interest. In addition if you an interest free period of 30 days or more, you can actually avoid paying any interest at all.
If that’s not possible, then be really disciplined by ensuring you pay as much as you can and always meeting the due date. Cleverly the banks try and make you feel good by highlighting the minimum payment you need to pay which will be a fraction of the total you owe. It’s definitely in their best interests – and not in yours – to do this so they can continue charging interest on purchases and over time charging interest on the interest of those purchases.
Another great hack is using the competitive market to your benefit. You’ll likely have noticed this thing called balance transfers which almost every provider offers these days. Essentially a marketing ploy to attract new customers, they’ll offer a period of say 12 months at a reduced or sometimes zero interest rate on any balance transferred over. You can use this to your advantage by transferring the balance from your existing credit card to a new provider and reap the benefits of paying down your balance at little or no interest for the offered period. Even better is that there are no restrictions on this meaning you can do this as many times as you like until you whittle away your balance to nothing.
There is absolutely no reason to be paying exorbitant interest rates on your credit card. Whether it’s by paying your amount in full each month, using interest free periods or balance transfers effectively you should be able to be a real party-pooper for the banks by limiting the interest you pay or paying no interest at all.
Reward yourself
In recent times reward programs have become a common product feature associated with credit cards. There are a number of different programs in the market but the premise is always the same. By making purchases with your credit card a corresponding amount is put towards a rewards program which can be accrued and claimed later on. Some of the more common rewards programs include discounts for flights and hotels or everyday purchases such as groceries, alcohol, fuel and an array of others.
Despite the research suggesting that rewards programs aren’t the cash cow they appear to be on the surface, we’re a cautious advocate of them. Assuming that a reward program isn’t used as an excuse to justify unnecessary spending, we figure you may as well get some benefit from the normal spending you’d incur anyway. You’d be surprised at how quickly the benefits can accrue by making the majority of your everyday purchases on your credit card and by taking advantage of the various introductory offers available. However this will only benefit you in the long-run by taking notice of our earlier suggestions especially paying the full amount owed each month.
Credit cards are a convenient and potentially rewarding payment channel that more of us are adopting. However the downside can be significant and these guidelines will help ensure you’re on the right side of the ledger when it comes to cost.
Action for the week:
- Do you know what your current credit card costs? If not, take a look paying particular attention to the annual fee, interest rate and any interest free period that applies.
- Review your current arrangements to ensure they’re working for you. This could mean taking a look at alternative products in the market or simply making changes to the way you use your current card.
- Consider whether your bottom line can benefit from the various features and offers available such as interest free balance transfers and rewards programs.
Credit cards are an important part of managing the household budget. Used in the right way you can avoid paying a high price whilst also realising more of the benefits. Avoiding unnecessary interest is a fantastic way to add to your bottom line and an important part of setting yourself up for financial freedom in the future. Getting this right and avoiding the all too common anxiety and stress that’s associated with managing finances will go a long way towards leading a happier and healthier life.
In our next post, we’re going to extend on a previous topic we’ve covered on the importance of disconnecting. With a focus on ways to rest, relax and recharge, we’re going to give you some tips that will help your energy, performance and well-being over time.
We’d love to hear your thoughts on credit cards, what has or hasn’t worked for you, and any other comments or questions you have. Please reach out to us at any of our social media channels.
Can you see us? No? Didn’t think so. For this reason we need to remind you that we don’t know who you are, your personal goals or current financial situation. As such the views shared in this post are expressions of things to look into and aren’t designed to be advice of any kind. We trust that you’ll do your own research including talking to an expert before making your own decision on whether these tips are relevant for your situation or not.
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