5 reasons you're failing at credit cards

Credit cards are a good servant but a cruel master. Sadly, for many people, the latter is the reality.

When you’re in control, credit cards offer interest-free loans and free rewards, not to mention plenty of convenience.

However, when you let your credit cards control you, they can suck up your money and leave you mired in debt.

If it seems like your credit cards are doing you more harm than good, it could be because you’re making one or more of the mistakes listed below.

1. You pay interest

Do you pay interest on your credit cards? If so, you’re almost certainly making a mistake. We won’t say you’re ‘definitely’ making a mistake, because there might well be a valid reason why you have to rack up interest sometimes. But as a general rule, paying interest is a waste of money.

You heard right – paying interest is optional. If you pay off your entire bill every month, you’ll never have to pay a cent of interest. So it doesn’t matter if you’ve got the lowest-rate credit card on the market (currently 7.99 per cent) or the highest (24.99 per cent) – you can choose not to pay any interest.

2. You make the minimum repayment

One reason people don’t pay off their entire bill every month is because they don’t realise it’s necessary. Some people think all the need to do is make the minimum monthly repayment, which is usually about 2 per cent of whatever they owe. However, the minimum repayment doesn’t protect you from being charged interest – it only protects you from being charged late payment fees.

Imagine you spent $1,500 on your credit card and you only made the minimum repayments. If your card charged 15 per cent interest, it would take you more than 11 years to repay the entire debt, at a total cost of $2,885.

3. You don’t read the fine print

Another reason people don’t realise they need to pay off their entire bill each month is because they misunderstand what “up to 44/55/62 days’ interest-free” means. The reason credit card companies use the words “up to” is because they rarely give you 44/55/62 days’ interest-free.

If your credit card has an interest-free period of “up to 44 days”, it doesn’t mean that the 44 days starts whenever you make a particular purchase. The 44 days actually starts at the beginning of a credit card statement cycle and ends with that statement’s due date.

Generally, there’s a 30-day gap between each credit card statement, which means that “up to 44 days” generally equates to one statement cycle plus 14 days. For example:

  • 1 September – statement period 1 begins
  • 30 September – statement period 1 ends
  • 1 October – statement period 2 begins
  • 14 October – statement 1 due date

So to avoid interest, any purchase made between 1 September and 30 September would have to be repaid by 14 October. That means a purchase made on 1 September would have an interest-free period of 44 days, while a purchase made on 30 September would have an interest-free period of only 14 days.

4. You pay annual fees

Paying annual fees is a bit like paying interest – there may be occasions when it’s justified, but it’s generally an unnecessary expense. If you do a quick search at the RateCity credit card comparison site, you’ll find that 26 of the 182 cards don’t have an annual fee, so there are plenty of fee-free options on the market. For the other cards, the average annual fee is $131.19, while the highest annual fee is $700.

5. You spend extra for rewards points

Sometimes, people will buy things they wouldn’t otherwise buy just to earn rewards points. This might seem like smart spending, until you realise that you might have to spend more than $100 just to earn $1 of rewards.

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Learn more about credit cards

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

How to get a free credit card

There's no such thing as a free lunch. All credit cards come with associated costs when used to make purchases, even if it’s simply the cost of making repayments.

However, many lenders offer incentives for customers such as a $0 annual fee or 0 per cent interest on purchases during an introductory period. Additionally, paying off your balance in full during an interest-free period means you could only have to pay back the cost of purchases without interest. You could also be eligible for additional rewards such as cashback during that time, saving you more money.

How do you pay off credit cards?

The best way to pay off a credit card bill is to set a realistic spending budget and stick to it. Each month, you’ll get a credit card statement detailing how much you owe and how long it will take to pay off the balance by making minimum repayments. If you only make the minimum repayments, it will take you years to pay off your outstanding balance and add extra costs in interest charges. To avoid any extra charges, you should pay the entire bill. 

How to calculate credit card interest

Credit card interest can quickly turn a manageable balance into unmovable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.

The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.

This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

What is a credit card?

A credit card is a payment method which lets you pay for goods and services without using your own money. It’s essentially a short-term loan which lets you borrow the bank’s money to pay for things which you can pay back – potentially with interest – at a later date. Credit cards can also be used to withdraw money from an ATM, which is known as a cash advance. Because you’re borrowing money from a bank, credit cards charge you interest on the money you use (unless you repay the entire debt during the interest-free period). When you apply for a credit card, the bank gives you a credit limit which sets the maximum amount you can borrow using your card. Credit cards are one of the most popular methods of payments and can be a convenient way of paying for goods and services in store, online and all around the globe.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

How do credit cards work?

Think of credit cards as a short-term loan where you use the bank’s money to buy something up front and then pay for it later. Unlike a debit card which uses your own money to pay, a credit card essentially borrows the bank’s money to fund the purchase. When you apply for a credit card, the bank assesses your income and assigns you a credit limit based on what you can afford to pay back. At the end of each billing cycle, which is usually monthly, the bank will send you a statement showing the minimum amount you have to pay back, including any interest payable on the balance.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

How to pay a credit card from another bank

Paying or transferring debt from one lender to the other is called a balance transfer. This involves transferring part or all of the debt from a credit card with one lender to a credit card with another. As part of the process, your new lender will pay out the old lender, so that you now owe the same amount of money but to a new institution.

Many credit card providers offer an interest-free period on balance transfers to help new applicants better handle their debt. During this period, cardholders are not required to pay interest on the debt they brought over from the other card. This can be a great opportunity for consumers to pay off credit card debt with no interest. There are often fees associated with balance transfers; normally, these are a percentage of the amount transferred.

So make sure you read the terms and conditions of the card before transferring any debt across.

What's the best credit card for rewards?

There is no one-size-fits-all best rewards credit card. It's best you research what type of rewards program you'd like, as well as the fees, interest rate and conditions associated with those types of cards before making a choice. 

Rewards credit cards can also come with high annual fees that may end up nullifying the rewards, so think how often you use the card to decide whether the benefits outweigh the extra cost for you. A card with a lower annual fee might require a lot of spending to get any useful rewards, while another card with a higher annual fee might need fewer purchases to get a reward.