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Five common credit card traps to avoid


Laine Gordon

By Laine Gordon

4 min read

With over 7 million credit card holders nationwide it's probably fair to describe Australians as credit card enthusiasts. And it's easy to understand why – credit cards are an incredibly convenient payment method, allowing you to make small or large purchases without the need to carry cash.

But credit cards can also lead you down the path to costly debt by allowing you to buy goods you can't afford to repay. On average, Australians in 2015 owe $4,300 on their credit card and are paying approximately $700 in interest a year. Being a responsible credit card holder requires you to read the fine print and familiarise yourself with common credit card traps to avoid a cycle of debt.

Here are five of the most common mistakes Australian’s make when it comes to credit cards that are costing you money:

Paying the bare minimum

Minimum repayments can be as low as 1.5 percent of the outstanding amount. But by paying the minimum, you don't cover your interest payments and end up paying more interest overall as it takes you longer to pay off your debt. Ideally, you should pay the balance in full each month. If that's not possible, pay as much as you can to reduce the amount of debt left sitting on your card.

Cash advances

It is important to note that interest-free periods do not apply to cash advances. In fact, credit card providers charge exorbitant interest on cash advances – approximately as high as 29 percent. But that's not the only trap associated with cash advances. In many cases, you will be hit with interest as soon as you withdraw the cash as well as having to pay a withdrawal fee. This fee may be a percentage of the amount you withdraw (the bigger the amount, the bigger the fee) or a flat amount. With cashless payments becoming increasingly available everywhere from cafes to clothes shops there’s really no need to be falling into such a costly trap.

Introductory rates

Most credit cards offer low interest rates for a short period of time to entice you to sign up. Such introductory rates last for up to 12 months before they rise to the standard rate – on some cards, this can be twice or triple the introductory rate. If you pay your monthly balance in full, this won't affect you; if you don't, this is a common and painful trap. Before you sign up to any credit card, ensure the “revert rate” is competitive.

Rising interest rates

Credit card issuers can increase the interest rate they charge you with little or no warning, so you may suddenly find yourself racking up debt at a faster rate. In some cases, the minimum repayment stays the same, which means you end up paying less of the principal amount while the interest grows. If this happens, it may be worth considering switching to a credit card with a better rate.

Multiple fees

In addition to the annual fee and interest charges, your card provider can slap you with fees depending on how you use your card. These can include fees for exceeding your credit limit, late payment of your monthly statement, replacing a lost card and making overseas ATM withdrawals. Use your card sensibly to avoid extra fees.

These traps shouldn’t put you off getting a credit card but they should make you think about how to use one responsibly. Before committing to a card compare what’s on the market to ensure you’re receiving the a competitive card that will suit your lifestyle and spending habits.

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