Using credit cards sensibly and within your limits is an important part of managing your finances.
There has been a real explosion of credit limits over the past decade. Credit cards are generally an expensive way to borrow money, with interest rates as high as 16 per cent or more. This can be up to three times more expensive than other loans such as home mortgages.
Government statistics show that excessive use of credit continues to be a major cause of bankruptcy, and is the second most common cause of bankruptcy behind unemployment. Many people stuck in a credit card debt trap opt for bankruptcy as a means of resolving their financial dilemma. But their blemished credit card record could stay with them for more than seven years, even if the bankruptcy has been discharged.
Credit control really comes down to being disciplined and not spending more than you can afford to repay. Here are some tips to ensure that you dont become your credit cars slave.
Use credit cards for transactions not credit
Credit cards are normally much safer than carrying large amounts of cash. They let you make transactions over the internet or over the phone and can be used to simplify regular payments. They provide a regular summary of your expenditure so that you can keep track of where your money has gone.
This strategy works well if you have the money in the bank to pay off the full balance before the due date. If you cant, you are taking out a loan at more than double your home loan rate.
Be careful in your transactions. A growing catch is that more companies are charging an extra fee for credit card use. A survey in 2006 showed 11 per cent of companies charge a survey and many more plan to do so. This means that you will need to be careful as to where you use a card or incur more costs.
TIP 1: Be disciplined and dont spend more on your credit card than you can afford to repay.
Dont use your credit card limit as a guide as to how much you can spend use your bank balance.
If you cant be disciplined apply for a debit card (with no overdraft) that only lets you spend the money in your bank/credit union account.
TIP 2: Make the repayments on time to avoid the late fee which will only add to your total, creating a larger minimum payment for the next month and a larger finance charge.
Plan your spending so you dont get caught out. Put money aside for big expenses like Christmas or council rates. Ensure that you spend on necessities first.
Pay debts before spending in discretionary items. This way you will know how much you have available to spend.
Avoid the interest trap
Remember that if you dont pay the full balance you are taking a loan.
There are many varieties of credit cards and you need to know how your one works. Many cards charge interest on the free days if you dont pay off the total by the due date. Compare credit cards at www.infochoice.com.au
All credit card providers try to tempt you into taking out a bigger loan. The minimum payment is a recipe for disaster. Usually its $10 or 2.5 per cent. That doesnt pay off much more than the interest so you will be paying it off for years.
Try the credit card calculator at www.fido.asic.gov.au to test some payments. Paying off $5000 with the minimum payment at 16.5 per cent would take over 23 years and a total of $5,805 interest yes more than the original loan. If you pay the same amount every month as the starting minimum of $125 each month would mean you pay it off in five years with a total interest of $2,310. Paying just $50 per month more (that is $175 per month) reduces the time to three years and two months and the total interest to $1,395.
TIP 3: If you cant pay off the whole balance, pay as much as you can and definitely more than the minimum.
TIP 4: Dont automatically accept increases in credit limits on credit cards, it will result in greater spending and greater debt a vicious circle.
Credit card providers want you in greater debt. Think of a bigger credit card limit as a big potential debt.
Escaping credit card debt
But if you do come unstuck, here are some tips that might help.
TIP 5: Dont make credit card debt worse If you have mounting credit card debt lose your card temporarily or cut it in half to avoid increasing the loan.
TIP 6: Budget carefully Develop a system for reducing your credit card debt. Pay off more than the minimum. Know when your yearly, quarterly and monthly bills are expected and set money aside for them.
TIP 7: Negotiate a solution If youre in financial trouble, make early contact with your credit provider to negotiate a workable arrangement, such as consolidating debts into your mortgage and looking at one of the low interest rate credit cards now available.
