For the next few weeks I’ll be working on a series aimed at me and my Gen-Y mates. I’ll be covering off some topics that people don’t really talk about. Hope you have a good read, let me know if there’s a topic you want covered off.
Credit card. The very mention of them brings with it all kinds of feelings and associations. For some credit cards have been very useful, and they were once a sign of ‘coming of age’. For others, credit cards are pure evil – to be avoided at all costs. Latest Australian Bureau of Statistics data tell us the average Aussie has a little over $3,000 in credit card debt! So what are credit cards and how do they work?
Credit cards are a quick and easy way of borrowing money without any kind of security. You take your Laptop to the counter, swipe the card, punch in your PIN (no signatures anymore), collect your shopping and you now owe the bank for your new Laptop.
All kinds of people use credit cards for many different reasons. Some use it to help their cash flow as they get paid monthly. Others use credit cards to help them pay big costs they haven’t saved for (car repairs, new TV). Still others use credit cards to spend more than they earn, racking up debt to pay the difference. Occasionally you’ll meet someone who spends every dollar they can on their credit card, slowly racking up frequent flyers or some kind of reward points. Some of these uses are good, and some not so good.
Credit cards used to be something you got because you were an adult. It was a statement that you now had your own income and expenses to manage and you might need to dip in to someone else’s pockets to make it all balance out.
In essence, credit cards exist because we often don’t manage our finances well enough to prepare for the circumstance we didn’t expect. There’s not really a good reason to use a credit card unless you’re paying the balance off in full before it accrues interest. Oh, and before every debit card was either MasterCard of Visa, a credit card was a simple way to be able to access money while travelling internationally.
The important bits
Credit cards are designed to keep you in debt for a long time. The longer you’re in debt, the more interest you have to pay. Minimum repayments on most credit cards require you to pay the interest plus a minuscule 2% or 3% of the balance, so your $3,000 in debt will accrue interest over the next 10 years at a rate of anywhere from 13%-23%. Keep making those minimum repayments and you’ll pay somewhere between $5,757 (13%) and $10,400 (23%) for that $3,000 worth of debt – not fun! The good news is it’s very easy to make extra repayments.
Credit cards have three different interest rates, yep…three.
1. Purchase rate – this is the interest rate that applies to purchases you make on the card.
2. Cash advance rate – needed to draw cash out using your credit card? That has its own rate.
3. Balance transfer rate – brought forward a balance from a different credit card? That too has its own rate.
Knowing what rate you’re paying is important because the chances are you can be paying less.
Banks don’t like people cancelling credit cards. So, you’ve decided a credit card isn’t for you and you want to get rid of it? Well, you’ll probably need to be persistent. The phone conversation with your bank is likely to go round in circles for a while as they try to convince you the problem is the card you have and they have many others more suited to your needs. Keep persisting and they’ll warn you that once you get rid of a credit card you might not qualify to get another one. Push through all the attempts to keep you and you’ll finally get free.
The truth is, there aren’t too many good uses for a credit card and it’s worth considering whether you should have one or not.