According to the old saying, death and taxes are the only certainties in life. We can probably add credit cards to that list – from online shopping to liberating us from the burden of carrying cash, it would be impossible to live a hassle-free lifestyle without a bit of plastic.
If not used sensibly, however, credit cards are a recipe for crippling debt. “Unless you pay the full balance each month, you will be paying double the amount of your original purchase because credit card interests are so high,” says financial adviser Marc Bineham, MD of Noall & Co and national vice president of the Association of Financial Advisers.
The average credit card interest rate in Australia is around 17 percent, a far cry from the interest you’ll earn on a high-interest savings account – for example, among the 500-plus high interest savings accounts listed on RateCity.com.au, the highest interest rate at the time of writing is 4.35 percent by ING’s Savings Maximiser.
Currently, RateCity lists ongoing credit card rates from 8.99 percent, and introductory rate deals for 0 percent for up to 12 months.
That’s why it’s important to be vigilant and take steps to avoid or minimise credit card fees and high interests.
How can you save?
Bineham suggests using alternative credit methods as a way of reducing reliance on credit cards. “If there’s something big you need, like a big-screen TV or a holiday, it’s better to get a personal loan rather than buy it on your credit card,” he says. “At an interest rate of 9 percent to 10 percent, a personal loan [can] cost you half as much in interest as a credit card.”
The safest way to use a credit card is to think of it as cash and pay the full balance each month. That’s the only way to avoid paying any interest.
“If you have credit card debt, you should prioritise paying it off as soon as possible – even if its means foregoing something to be able to do so – and then paying the card in full each month,” advises Greg Pride, financial planner with Centric Wealth.
Credit card saving tips
In addition to paying off your card in full each month, there are other tricks to save while enjoying the convenience of using a credit card.
- Set up a direct debit to pay a fixed amount or the full balance on payday. This way you will also avoid late payment fees.
- If you cannot afford to pay off the full amount each month, compare credit cards using a site like RateCity and switch to a card with a low interest rate and make bigger payments when you can.
- Do not use your credit card for cash advances as these carry high fees.
- Keep track of your spending on your card to ensure you stay within your limit. Exceeding your credit limit also incurs fees.