Amy Bradney-George investigates your options for regular credit card use.
Four in 10 Australians expect to use their credit card to pay for otherwise unaffordable expenses this year according to new research from Dun & Bradstreet Australia.
Their latest Consumer Credit Expectations Survey indicated that reliance on credit cards extends to planned major purchases, with 45 percent of people expecting to buy on plastic. But this type of credit card use can lead to more challenges in the long run, affecting payments and, ultimately debt levels.
If you are one of those who will be using a card for things otherwise unaffordable, consider the following situations and make sure your current card is right for you.
Pay bills now, pay interest later
When bills all come at the same time it is a struggle to pay everything off on top of regular expenses such as mortgage payments or groceries. If $250 worth of bills was put on a credit card, paying the minimum amount could stretch your money even more than paying upfront.
With a 19 percent interest rate and no other debt it would take three years and cost $71 in interest on a minimum repayment of $10 each month. If there was already $500 on the card, the total interest paid would be $314 on a minimum repayment of 3 percent per month.
By switching to a card with an interest rate of 10 percent would save $185 off the $314 and reduce the time to pay down the debt by 12 months to three years.
Paying more than the bare minimum is the best way to lower a card’s balance, but if bills are a consistent problem, finding a low interest card with a decent minimum repayment plan is also a good option.
Major purchases and plastic fever
Since September 2009 there has been a 5 percent increase in households planning to use credit for major purchases, the Consumer Credit Expectations Survey shows.
A purchase of a fridge for instance will definitely make a dent in your finances. For a $2,000 fridge paid for on a 19 percent interest rate credit card, $866 would be paid in interest if 3 percent minimum repayments were made. It would also take four years to pay off.
On an interest rate of 10 percent the cost comes down to $353, and would still take three years to pay off.
In both of these situations, making more than the minimum payments would be the most effective way of reducing the amount of interest paid. But it makes sense to find the right card type for your needs.
With so many different cards available, researching the market online provides a real advantage when using your card.