Australians are becoming increasingly savvy when it comes to credit card use, People’s Choice Spokesperson Stuart Symons says.
Latest data from the Reserve Bank (table C1, rba.gov.au/statistics/tables) shows a 14.6% fall in the number of cash advances over the past 12 months, led by a significant fall in the number (21.1%) and value (16.4%) of overseas withdrawals. Total personal transactions, however, remain fairly stable with a 3.6% fall in the number of transactions over the past year and a 0.2% fall in the total value of transactions over the same period.
Reassuringly, credit card balances accruing interest have fallen 3.1% over the past year to $50.562 billion.
However, there remain some key rules to using credit cards wisely, Mr Symons said.
1. Credit cards are not free money – know the rules and stick to them.
“Credit cards often offer interest-free periods and large credit limits and, for that reason, can be useful for managing your purchases and cash flow. But don’t think this is an open door to larger debts. Know how long your interest-free period is and pay off your debt in full before then. That way you get the benefit of the cash flow flexibility without building up a debt that can spiral out of control,” Mr Symons said.
2. Pay off in full, every time. Or work towards it.
“The greatest problems often begin with something small, like not paying off a credit card debt on time. It may only be a small interest payment, but it can build. And then build again,” Mr Symons said.
“If you have an outstanding balance of $5,000 and an 18% rate applied, that’s $75 a month spent on just keeping up – money that can be better spent on saving towards something you need. Of course, there may be times when you might want the benefit of the finance that a credit card provides for those unexpected emergencies. Be aware of the costs, make at least the minimum payments and know where you are heading to pay it off.
“If you can’t see the way out, speak with your financial institution as early as possible to discuss alternatives. You may be able to convert it into another facility that will lessen the immediate pressure.
“On the other hand, showing a steady record of paying your credit card debt on time will not only save you from entering a debt spiral, but will improve your credit record. That is a good story for all.
3. Match your purchase and funding horizons.
“You wouldn’t take out a home loan over 25 years to pay for a new dress or a book,” Mr Symons said. “In the same sense, think about credit cards as a short-term credit solution for short-term purchases. Don’t use them for longer-term assets like cars or even housing renovations. There are better financing solutions that match those investment horizons and let you spread the cost over a longer period. Credit cards should be thought of as a solution for something that you can pay off within the next 30 days – nothing more.”
4. The point of a credit card – is not points.
“Credit cards are a short-term financing tool. While many offer rewards schemes that recognise your spending with points to acquire goods or travel, you may pay for these with higher annual fees or rates,” Mr Symons said.
“The industry has seen a steady devaluation in points offerings, and we can’t see that trend disappearing any time soon.
“Primarily look to how you use your credit card as a method of financing your needs – not as a secret key to unlock more consumer dreams.”
5. Cash advances advance your interest – but only interest payments, not your personal interests.
“Recent data shows people are becoming more aware of the pitfalls of relying on credit cards for cash advances. Many cash advances charge interest from the day of withdrawal, so you don’t necessarily gain the advantage of the interest free period. In other words, you’re paying additional interest and boosting your debt, which isn’t in your own interest,” Mr Symons said.
“Be aware of the charges and risks. With tap and go, and Google Pay, Apple Pay and Samsung Pay and there are other ways of readily accessing your debit facilities with little need for cash. If you can’t afford something right there and then, first ask whether you can afford it. If you need it and can pay it off in the next cycle, turn to your credit card and stick to your payment rules to avoid higher interest charges.
6. Credit cards work with rules – just don’t treat them as a dream machine.
“Credit cards are a handy tool that most people use – and certainly an increasing number of businesses are turning to cards for easy purchases of needed goods and supplies,” Mr Symons said.
“The dangers come when they are used unnecessarily, or with no regard for the terms and conditions or a person’s ability to repay. Be sensible, and use them as the short-term financing tool they are designed for.”
7. Keep the ‘eye’ in credit – check transactions and reconcile regularly.
“Credit cards are a ready source of finance, but also a risk of fraud. They best thing to do is to keep a regular eye on the transactions passing though your account using your banking app. Also look at each monthly statement and check off your receipts. This had an added bonus – you will be more aware of what you are spending, where and when,” My Symons said.
“This will also reveal whether you’re able to meet the minimum payment and minimise your interest. Credit cards can provide a handy support when you need it, but always be aware of how you intend to pay it down. If you can’t see that path, contact your financial institution early so you can explore other options and facilities that may better suit your needs.
“If you are actively thinking about your spending and control, you’re more likely to actually be in control of your spending.”