Credit card sinners, you don’t need a tablet of stone to lead you in the right direction. All it takes is a bit of financial planning to keep your credit card score on the side of good.
While a recent Reserve Bank of Australia study revealed that Australians were cautious with their credit cards, debt is still on the rise thanks to interest costs and other charges.
The annual rise in debt of $375 million, or 2.8 per cent, to $49.99 billion at the end of the 2013-14 financial year, was modest, but as our collective debt rises, it seems Aussies are not getting any keener to pay off their credit cards. That figure was almost exactly in line with the average annual rise over the six years since the worst days of the global financial crisis in 2008.
Credit card debt is one of the worst kinds to hold because the interest paid is very high – up to, and some times above, 20 per cent. To put that in context, some other forms of debt, like home loans, are now at less than 4 per cent. So avoid financial purgatory by faithfully following these 10 credit card commandments.
1. Pay your balance
Thou shalt pay thy balance in full each month. When you receive your credit card bill, it’s probably the last on the list of payment priorities. However, if you’re disciplined each month and pay off the full balance (not the minimum payment requirement) you’ll avoid paying interest. You could even consider setting up automatic payments.
2. Low interest
Thou shalt have a low interest credit card. We all slip up every now and then, so a credit card with a low interest rate won’t break the bank if you’re a bit late paying your credit card bill. Financial comparison site Mozo compared 203 credit cards in the Experts Choice Awards and found the McGrath Pink Visa saintly for its 4.74 per cent intro rate and 8.99 per cent revert rate.
3. No annual fee
Thou shalt not pay an annual fee. Unless you’re a frequent jet setter or keen shopper looking to accumulate rewards points, avoid hefty annual fees. It shouldn’t be hard to find fee free plastic – there are 31 credit cards in Mozo’s database with no annual fee.
4. Definitely no cash advance
Thou shalt not use your credit card for cash advances. While they mean instant cash, the high interest rate is not worth the convenience. On top of this, the interest free days exclude cash advances, so you’ll be charged interest as soon as you withdraw money.
5. No rewards
Thou shalt not spend more with rewards cards. For those that enjoy rewards cards don’t be tempted to increase your spending. The high cost of late fees and interest are unlikely to be balanced by those rewards (if you can’t keep up repayments).
6. Create a budget
Thou shalt create a spending budget. Think of a credit card as a mini monthly loan from your lender because you’ll have to pay it back with your own cash. Make a budget you can stick to and avoid getting into debt.
7. Read fine print
Thou shalt read the fine print. Look out for sneaky fees in the terms and conditions and sign up for a credit card with a generous interest free period.
8. Know your purchases
Thou shalt review thy purchase history. The great thing about credit cards is you can easily review your spending habits. Also keep an eye out for any transactions that look dubious and report it to your financial provider.
9. Stay monogamous
Thou shalt not be a promiscuous credit card user. Think about your credit card habits and only apply for plastic you actually need. Read how to get the best out of your chosen card here.
10. Balance transfer
Thou shalt use a balance transfer if in debt. Moving your debt across to a 0 per cent balance transfer credit card will help you earn back your credit card wings. But don’t make new purchases on the credit card and only use it to pay off debt.
Kirsty Lamont is a money expert and director at comparison website Mozo.com.au