In this week’s ‘Make Credit Work For You’ post we look at credit cards. Do you currently have a credit card? Do you know what your interest rate is? Do you know if you really have the right credit card for your financial circumstances? With so many choices for rates, fees and rewards – it’s smart to spend some time thinking about the appropriate one for you. Knowing how to make your credit card work for you, which starts by picking the right card might just save you from credit debt and ensure your credit history is clear as you work towards larger financial goals.
By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repair and www.fixmybadcredit.com.au.
Almost half of Australians are in the dark about their credit card. According to a Choice Survey last month, 48% of Australians who used their credit card recently weren’t sure how much interest they would be charged.
This “interest rate ignorance” has according to Choice, meant a big windfall for the creditors.
Since June 2011, the average credit card interest rate has moved 176 basis points above the Reserve Bank’s cash rate, earning the banks an extra $630 million this year alone.
Bit by bit, the banks have been sneaking their rates further away from the baseline. At the moment the average credit card interest rates sits 14.41% above the cash rate, up from 12.65% in June 2011, according to calculations from commercial comparison website Mozo.
That adds up to a lot of debt – and a lot of uncertainty.
“As a nation, we’re paying interest on more than $36 billion of credit card debt, yet almost half of us are uncertain what it costs us,” says CHOICE CEO Alan Kirkland.
This “interest rate ignorance” points to a wider symptom of credit ignorance which has many households making poor financial decisions for their individual situations. It can be paralleled with the prevalence of high interest rate home loans for people with poor credit history. Whilst some people may need to choose this type of home loan – it isn’t always the right option, and can end up costing families tens of thousands more in interest unnecessarily.
Whilst it is imperative to know the interest rate on your credit card – what is even more important to know – is that you have the right card for your circumstances. One which you can pay back – on time!
Too many times people can be lured in to choosing cards with rewards or other gimmicks – which are not suitable for them and which can end up costing them severely for years to come.
Facts about Debt and Credit Cards
If you are more than 5 days late paying your credit card this will show up on your credit history as a ‘late payment notation’. This notation will remain on your credit file for 2 years. Multiple late payments will probably mean you are refused mainstream credit for 2 years, or only offered credit at much higher interest rates.
If your credit card goes unpaid for 60 days or more – you will have a default placed against your name. Defaults remain on your credit file for 5 years.
Any adverse credit listing will mean you are either refused mainstream credit, or only offered credit at higher interest rates. So you want to avoid this ‘credit death sentence’ by choosing the right card for you in the first place.
Recently Savingsguide.com.au covered in depth the pros and cons of each different type of credit card, in their article How To Choose The Best Credit Card.
You need to ask yourself some great questions to be clear about your credit card usage.
If you don’t know what you’re paying in interest – that would be a great first question to ask. The other question to ask – is how am I using my credit card? Is it for emergencies only, am I a hefty credit card user or somewhere in between? Do I tend to pay the balance off each month or carry it over? Do I have a current debt on my card I need to pay down?
The answers will all determine which card is right for you.
SavingsGuide make some suggestions about who should choose what card:
They advise, if you are just going to use the card for emergencies – you are probably best looking for one with low or no annual fees.
“This card is perfect for people who rarely use their credit cards, save their credit cards for an emergency or religiously pay off their credit card before the interest period.
“If you’re never earning any interest on your card, it’s more important to save money on the annual fee than it is to consider how the interest rate would affect you.”
If you use your card regularly – and if you pay the balance off each month –then you are probably the best type of person for a rewards program.
“If you use your credit card regularly for everyday purchases and are capable of consistently paying it off within the interest-free period, then a rewards card might work well for you.”
If you are having trouble paying the entire balance off each month – a low interest rate seems ideal.
“If you’re totting up interest on a card, it’s essential to keep your interest rate as low as possible. Otherwise, you’ll find it increasingly difficult to get on top of the credit repayments.”
If you have debt you need to pay down – you could switch to a balance transfer which allows you to pay off the card with low or no interest.
“If you need some breathing space, being able to pay off debt without having to worry about interest for a couple of months might be exactly what the doctor ordered.”
Tips to prevent bad credit history from credit card debt
Create your own credit limit.
Set yourself a limit based on what you can comfortably afford to repay. It’s important to realise that you will pay at some point for the credit you use. Make sure at worst case scenario you can afford to repay it. You will then have confidence in your spending without the temptation to overspend.
Don’t exceed the credit limit.
This will just mean you incur hefty charges.
Pay off the balance each month.
Ideally, pay off the entire card balance within the interest free period. If you don’t, you will be charged interest right back to the date you purchased each item. You not only lose the interest-free period on those past purchases, but until you pay off the balance there will be no interest free period on anything you spend in the future.
Or, choose a low interest card, but still pay more than the minimum repayment amount each month.
If you have debt which carries over on your card month to month you should look at a card that has a lower interest rate. It may not offer an interest free period, or hefty rewards points, but the lower interest rate should mean the carried over debt is more manageable for you, and will prevent you from getting into trouble with credit and ending up with defaults or late payment notations on your credit file (bad credit history).
Avoid cash advances.
Interest usually applies immediately on any cash advances from credit cards – whether the withdrawal is within the interest free period or not.
You can also visit ASIC’s MoneySmart website for further information on how to choose the right credit card.
For help repairing bad credit history, or more information on your credit rating, visit our website www.mycra.com.au or call MyCRA Credit Rating Repairs tollfree on 1300 667 218.
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