When people think about credit cards, generally two words come to mind -- debt and rewards. It isn’t all evil, because there are plenty of benefits and great ways to use it in order to manage debt. If you’re vigilant, credit cards can be a smart tool. But if you’re not, they can get you into a lot of trouble.
Debt decades
Readers who were born in the 1970s and ‘80s grew up in debt decades, when credit cards became all the rage and people spent frivolously without much concern for consequence. The good news is that as a country, we have changed our habits. At this time, credit card balance continues to fall. This shows that people prefer to spend within their means and are utilizing debit cards to do so.
Know your limit.
The average credit card has an interest rate of about 20%. If you’re holding on to $10,000 in credit card debt, you’ll pay $2000 in interest per year before you even start to make dent in the actual debt. Always pay more than the minimum required. If you only pay the minimum, you’re only paying off the interest.
Check the details.
If you use a credit card for expenses at work (as an example), you want to make sure you have a good interest-free period. These vary so pay attention. Also, you want to look at the annual fee. Some cards with a lower interest rate have an annual fee of $99 or more.
Regarding advances on credit cards, the short answer is DON’T DO IT. However, if you’re in an absolute emergency situation and you have to, know that from July 2012, regulations have changed so that any payments need to be directed to the most expensive credit component first. So because cash advances come with a higher interest rate (21.5% for example), repayments on the card will go to that expense first.
Cap your cards.
If you like having a wad of credit cards, have a maximum of two, and maybe one spare that is only active in case of emergency. People who have a purse full of plastic tend to put a little on this car, a little on that one, and then start losing track of what’s going out all together. This is a common problem for people who get hit with a lot of expenses over a short period of time, such as the holiday season or during a home renovation. Technology is a great thing and there are plenty of apps that can help balance your chequebook, so make sure you utilise them.
Be careful with rewards programs.
Credit card companies are smart. They love using freebies, such as membership rewards to get people to spend. The problem is that in many cases, it takes thousands of dollars in spending to get any sort of reward.
Be wise about your spending. A debt-free life is a happy life. For more tips, consult Australia's banking & financial experts.