Wise Use of Credit Cards to Help you Financially

Wise Use of Credit Cards to Help you Financially

I'll explain how credit cards work for the benefit of the many Australians who don't have any. They are a vehicle for providing instant debt financing up to a predetermined limit which is set either by you or the credit card issuer (a bank, a building society, a credit union, or a credit card company). The whole idea of a credit card is to enable you to buy things at shops and businesses without the need to have the ready cash, or to enable you to receive a cash advance against the card through a bank, a money changer, or an automatic teller machine (ATM).

Whenever you make a purchase or take a cash advance against your card you incur an immediate or deferred interest charge on that transaction. And the way interest is accrued normally places the card into one of two camps - where interest is charge immediately, or, where you have up to 55 days interest-free before any interest charges kick in. (In the case of cash advances interest always accrues immediately).

Whether you have a card with up to 55 interest-free days on purchases or one that accrues immediate interest depends upon the policy of the card's issuer and some will offer customers a choice between the two. When you opt for a card with an interest-free period you are more likely to be charged a higher interest rate. Also, the cards with interest-free periods are more likely to attract an annual fee - ranging from around $15 to $50 - than immediate-interest cards on which there is normally no annual fee. Some cards also have nominal transaction fees.

As a card-holder you are sent a monthly statement detailing all purchases and cash advances and any interest that has accrued over the period. You then have the option of paying the account in full or just repaying as little as a specified minimum monthly amount by a specified date.

Clearly it is better to pay the account in full to minimise interest charges, but many people just pay the monthly minimum, rolling over the bulk of the account into the next billing period, which is highly inadvisable. The compounding interest makes buying things on credit very expensive and if you continue to make further purchases with the card you'll find yourself in the grip of serious debt.

Now, it's at billing time you want to pay particular attention to the issuers' policies on interest-free periods. (These can be quite rigorous and, as they vary from one issuer to another, it's a good idea to shop around for the card with the best conditions and rates- though they can be changed at any time.)

When you receive your statement you normally have 25 days (although it may be only 14) to pay your bill. If you don't pay the statement out in full some cards charge interest on the outstanding amount taken back to the items' purchase dates, not to the end of the interest-free period. What's more, if you buy more on your credit card before you've totally paid the amount already owing you may be charged interest from the date of the new purchases - in other words, no more interest-free period. Your interest-free period on any new purchases may not be reinstated until you have paid fully for all previous purchases.

More issuers offer their customers a choice of credit cards: Visa, MasterCard and Bankcard. There is really no significant difference between them except that Bankcard is not accepted internationally and is increasingly being overshadowed by the others.

Tips on using credit cards

Look, I know that relatively easy access to personal loans and credit cards can be very helpful at times when money is (temporarily) tight or you find yourself in an emergency where you need funds on the spot. But you mustn't let the ease with which you can get access to debt undo you.

Credit cards are particularly hazardous for those who, by their own description, are 'born to shop'. 'Born to stay broke' is more like it. My recommendation to anyone who fits this description is to throw your credit cards away, now.

For those of you who do want to convenience of a card, here are some guidelines.

  • Shop around for the best card - these are differences between them.
  • Only keep a minimum number of cards - preferably one.
  • Try not to carry any debt from one billing period to another.
  • Carry a card that is readily acceptable overseas.
  • Try not to use your card, that is, try to pay cash!

My last word on credit cards is they can be very convenient, they are safer than cash in the event of loss or theft, and they are very useful if you are travelling overseas, particularly in the USA where sometimes only credit cards (not cash) are accepted. The trouble is that they make buying too easy, which erodes your savings and in many cases lumbers you with excessive debt. You must exercise control over your credit cards, rather than the other way around, and you must certainly never delude yourself that having a credit card is the same as having the cash in your pocket!