July 2008
G’day and welcome to the first Mates Rates Money financial article.
Together we will be exploring different aspects to money and our personal finances. Recently many clients, friends and loved ones have asked me for advice on credit cards. The humble credit card has to be one of the most used, abused and little understood financial products available. That said they do have their place as an extremely useful financial tool when used properly.
On applying for my first credit card my father said ‘’Credit cards are like razor blades; you can shave with them or cut your throat wide open!’’ The reason for this dire warning is credit cards allow the consumer to purchase an item or service on credit. That is to say someone else’s money.
The full or partial payment is then generally due in 55 days depending on the provider. If the payment is not made in full then credit card interest is then payable on the outstanding balance. So what? Buy now and pay later – great! Credit card interest rates vary enormously. Some credit cards attract interest rates of well over 20%! With very high interest rates you may quickly find that a significant chunk of your income is simply paying your credit card interest each month.
Some credit cards come with a rewards program. Check the details and costs of these rewards carefully. The benefit you get from them may not always warrant the extra cost. Generally, these cards attract higher annual fees and interest rates. A card with no fees may suit you just as well and save you money.
There are now dozens of transfer cards available. These offer extremely low or even zero interest for a certain period of time on balances (debts) transferred from other banks. These products can be useful for bringing an existing debt under control. Though watch out, often new purchases on these cards may attract a higher interest rate than the amount transferred. Also lenders may approve you for higher limit than you need. Always be careful. Don’t over spend and have a budget in place. Without a plan of attack people often transfer the debt and then it grows on the new card.
When used properly however, credit cards can be extremely useful. A savvy consumer can make all their purchases on their credit card, meaning they won’t attract excessive transactions on their savings account. This strategy can greatly reduce the fees you pay your bank. The prerequisite to this strategy working is always paying your credit card off entirely before the due date. Therefore you will NOT be paying any interest on the card. Having a set budget helps this process no end. Credit cards also offer flexibility of payment and for some people the reward programs can be a great bonus.
Perhaps the greatest benefit to a cedit card is you’ll never be lonely again. Just try missing a couple of payments and all sorts of people will start calling you. Just kidding, don’t shave too close!
Evan Davis
