Much has been written on personal finance sites and financial independence blogs about credit cards.
Some suggest that they are a leading cause of growing personal debt these days. There is no doubt that used incorrectly and naively, credit cards can be one of the fastest paths to financial ruination perhaps only surpassed by pumping pokie machines full of cash in an attempt to get rich.
However, others opine that managed well, credit cards can be a useful budgeting tool, giving you the flexibility to pay for goods without carrying cash, help smooth out your budgeting, and in some cases, provide valuable rewards.
Me? I’m in the second camp. I would estimate my spending on credit card versus paying cash at around 95% going onto the plastic and 5%, if that, paid the old fashion way. In fact, I only ever carry around 30-bucks in my wallet and that can last me 2 or 3 months. I reckon that the inflationary loss on the cash in my wallet actually may exceed the value of carrying it.
Eeeny, meenie……..so many to choose from
Until a few years ago, there wasn’t a lot of choice out there for seekers of the plastic fantastic. Generally, they were only issued mainly by banks with the exception of a few credit card companies. Providers usually only had one flavour of card, the fees were pretty steep and for those foolish enough to leave their cards unpaid each month, the interest rates were off the planet.
Then we started seeing collaborations between the card issuers, not the banks, but the companies that actually provide the credit facility, and other businesses. Suddenly, there were airline-branded cards, supermarket chains offering their version of familiar card names, and insurance companies and credit unions jumping on the bandwagon to get a slice of the action.
Many of these branded cards offer rewards specifically designed to generate customer loyalty through spending more money with them. Rewards such as free grocery deliveries, booking fees waived, no annual fee, or low interest rates. There’s even one out there that gives you free fries with every purchase at Maccas!
However, the rewards offered by Australian and New Zealand issued cards pale in comparison to those offered by US-based providers. I’ve read about the significant cash-back incentives and travel rewards paid, often just for signing up as a new customer. Known as ‘credit card hacking’ some make a pretty good side-hustle income swapping and changing cards to take advantage of the incentives offered.
How do I manage my credit card spending?
I’ve been using credit cards to pay for the majority of purchases for at least 25 years. In this time, I have never missed making payment, in full, at the end of each billing period. For this act of diligence, I have paid to the card companies, the big fat sum of $0 in interest and penalty fees.
Over the years I’ve flexed, inserted, swiped and waved a variety of different cards, including the old fashioned one-size-fits-all bank issued cards, various rewards cards, a number of cheapy reward-less cards, and am currently the holder of a gold MasterCard and gold American Express issued by my bank. Both share the same account so I only pay one fee and all transactions are recorded in a single statement.
So why have two? Well, both cards provide reward points but the Amex delivers 2 points per dollar and the MasterCard, only 1 point per dollar. Guess which one gets used most often? However, the vendor fees on the Amex are much higher than the MasterCard since someone’s gotta pay for all those extra points. As a result, some vendors don’t accept Amex, or add a surcharge, which is when the MasterCard gets to see the light of day.
But, and it’s a big but, since I’ve become a frugal, less spendy, reluctant consumer, do the points earned throughout the year exceed the $119 annual card fee? Well, no they don’t. So why not trade in gold card status for something much cheaper and more in keeping with my current, frugal station in life?
One of the features of my cards is that they offer comprehensive travel insurance for the holder and travelling companion whether you actually use the card to pay for your travel, or not.
This year alone, that benefit has provided me with a $200 policy for our recent trip to Bali, and with my upcoming trip to the USA, one of the most expensive places to go, travel insurance-wise, that’s around another $200 saved. Thank you Mr Amex.
Avoid the common credit card user pitfalls
How then have I managed to avoid the pitfalls that many discover, to their dismay, when their credit card spending goes a little haywire?
Well, it’s not the spending that’s the problem. It’s the paying back of said debt that causes the grief. It’s very easy to ‘chuck it on the card’ so the reality of what that new TV, trendy hairdo, flash sunglasses or to-die-for pair of shoes costs is greatly diminished. If you had to stick your hand in your pocket and pull out a wad of hard-earned cash, the gloss may well fade from that purchase. Or then again, it might not…..
Choose your card wisely
First thing is, work out whether you really, I mean, really need a ‘credit’ card, or will a debit card suffice. These days, pretty well all banks offer debit cards that not only look like their debt-inducing cousin, but also allow you to make purchases in ways that use to only be possible if you had a credit card, buying online for example.
Not only are there often no fees with a debit card, but when you flex this piece of plastic, you’re spending your own money. When it’s all gone, you can’t put any more on the tab.
Next, once you’ve decided that you’re able to manage the sometimes tumultuous relationship between you and debt via a small slice of plastic, you need to decide what flavour it’s going to be. And what a selection there is to choose from.
Low fees, no fees, super low fees, travel miles and insurance rewards, bank, supermarket chain or airline branded, plain Jane, silver, gold, or platinum. There’s something to suit everybody.
For kiwis trying to negotiate the plethora of card offerings available, Credit Cards Compare is a credit card comparison website that allows you to compare the use array of cards available to you in New Zealand. It even has links to the provider so that you can go straight to the online application form.
For Aussies, Finder is the go-to place to peruse what’s available and provide you with guidance to select the card that suits your circumstances.
Four tips to avoid being screwed by your card
So it’s finally arrived in the post. You know, the nondescript envelope that seems to contain an un-bendable object hidden in the centre. Now, before you embark on your first spending spree, what should you know to ensure that you stay on track for financial independence, which I’m guessing is the reason you started reading this in the first place, rather than end up in the same debt-ridden pit as so many do these days?
1. Understand what the interest-free period means
Most cards give you anything up to 55 days credit before the card needs to be paid in full or you will begin paying interest on those purchases. This means that if you buy something at the beginning of the billing cycle, you may have up to a month and a half before payment is due.
2. Know which card to use
Don’t use a credit card if the retailer wants to sting you to use it. You may get a few extra reward points but you can be sure that the points are not worth anywhere near the cost of the surcharge.
If the seller has a surcharge, use your debit card or pay cash.
3. Know YOUR spending limit
It may be obvious but just because your card has a spending limit of $10,000 doesn’t mean that you do. This is where many get into strife. Just because you have that shiny piece of plastic in your wallet doesn’t meant that you have to use it. Your spending should not increase as a result of having a credit card. Continue to maintain you existing budget and, hopefully, frugal spending habits and remember, a credit card is just an alternative way to pay for stuff instead of using cash.
Which leads to the biggie….
4. Always, always pay off your card in full on the due date without fail. The interest rates that credit card providers charge, as well as any late payment fees, will make your eyes water. And do you know why they charge so much? It’s partly to fund losses from fraudulent use of credit cards and holders who default on their payments. This means that it’s you who’s making sure the card companies reduce their loss while further increasing your own debt.
If you can, set up an auto payment from your bank account to pay off the full balance of your cards when they’re due. I set a reminder on my phone for a couple of days prior to check that there’s sufficient funds in the account to cover the full payment.
So, just in case I didn’t make it quite clear….ALWAYS pay your card off IN FULL on the DUE date.
Australian’s rack up $32b of credit card debt
According to the Australian Securities and Investments Commission (ASIC) MoneySmart website, Australian’s currently have $32 billion racked up on their credit cards accruing interest of $5.54 billion in interest per annum. That’s an average $4,281 of debt per card on which the holder will pay out an average of $737 in interest this year.
Those figures suggest that cards aren’t being paid off each month and that many holders are using their cards to increase debt rather than live within their means.
And finally, don’t use your credit card to cover emergencies, or if you’re running low on cash before payday, or, heaven forbid, to take out a cash advance. It may get you through the immediate crisis but then you have to pay it all back to avoid paying interest, and it’s too easy to become a regular habit.
How to avoid this trap? Build up a savings buffer or emergency fund to a level that’s going to cover most unexpected payments, stay on the side of financial goodness, and avoid letting your credit cards become an instrument of the devil.
I haven’t personally got any horror stories of how credit cards have nearly financially ruined me. Have you? Or have you got any helpful suggestions about how you manage your cards to share with us? We’d love to hear your experiences in the comments below.