Expert tips to trim your credit card bills

Expert tips to trim your credit card bills

Australians owe about $50 billion on credit cards so it’s little surprise that many users are being hit with hefty interest charges.

An online poll has revealed that cardholders are mostly split when it comes to paying off their credit card debt. A third of respondents pay their credit card bill in full by the due date, while a third do this only sometimes. The rest don’t pay off their card in full and, consequently, pay hefty amounts of interest.

Transactor or revolver – which are you?

Credit cardholders are usually split into one of two groups: “transactors” or “revolvers”. A transactor uses a credit card to their advantage and avoids interest by paying off their bill in full by the due date. Revolvers are the opposite – they are unlikely to pay off their card in full and end up forking out more in interest.

David Berry, nab’s acting general manager of cards and personal loans said the majority of credit card users do manage to pay  off their card before interest hits.

“Approximately 55 percent of our customers pay their account off in full every month,” he told News Ltd. “Customers who have a large revolving balance should move to a low-rate card.”

ME Bank’s acting head of cards, Ian Turnbull, said the two types of card users are poles apart. And, he says, it can be difficult to move from being a revolver to a transactor.

“There’re behavioural things you can do but it comes down to the level of balance that you are carrying to work out how difficult it is,” he told News Ltd.

“In the extreme we are helping people through hardship, consolidating debts and moving it to the lowest interest rate, whether that’s a home loan, personal loan or cheaper credit card.”

How to be smarter with debt

RateCity did some research about the true costs of repaying a credit card and the results were pretty surprising, and more than a little scary.

If you took a low-rate credit card – say 14 percent – and only repaid your debt at the monthly minimum of around 2 percent, take a guess at how long it would be before you were debt free. A $1000 balance would take you over 13 years to clear, a $5000 balance nearly 30 years and a $10,000 balance a whopping 36 years!

RateCity CEO Alex Parsons, said some Christmas spending or an overseas trip might feel OK when you put it on plastic, but it’s just as much of a debt as borrowing for a house or car, and a lot more expensive in terms of interest rate.

But there are strategies to help you be smarter with debt, he said: “Look at your budgeting – you’re obviously spending more than you are earning.”

When choosing a credit card, consumers should look closely at the fees – many card users will be familiar with annual fees but these can easily be avoided as many cards simply don’t have this charge.

Under credit card laws, consumers can nominate their own credit limit – so cut it down to a manageable amount, he said.

“The number one way out is to pay the debt off faster, the simple act of moving from 2 percent of balance repaid every month to 4 percent can have a significant impact,” he said.

On a $10,000 debt at 14 percent, paying 4 percent off every month will see you clear the debt in 13 years, as opposed to over 36 years if you only repay 2 percent.

Another useful way to deal with a large credit card debt is via a balance transfer card, which allows you to transfer the balance across to another card – usually with no or lower interest – and close the first one down.

“Balance transfers aren’t a ‘get out of goal free card’ though. You still owe the same amount of money and if you don’t repay it in full during the honeymoon period, you may face a jump in interest rate back to, or even, above what you were paying before the transfer,” he said. “But if used correctly, a balance transfer can be a good way out to getting back on track with your debts.”

Getting into excessive credit card debt is a trap many of us fall into at some stage of our lives – the real test is whether you have the discipline to pay your pay out of the trap.

 

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about credit cards

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 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.

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.

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 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.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

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.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

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.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

Which credit card has the highest annual percentage rate?

The credit card market changes all the time, so the credit card with the highest annual percentage rate is also liable to change.

Keep in mind that credit card interest rates are expressed as a yearly rate, or annual percentage rate (APR). A low APR is generally good but also consider:

  • There can be different APR's for each feature of the card (e.g. purchases may have an APR of 14 per cent, while cash advances on same card could have an APR of 17 per cent.
  • Credit cards with a variable rate can change throughout the year, affecting your APR, so check the full details.
  • If you pay your balance in full every month, having the lowest APR is not as important as the other fees associated with the card. However, if you carry a balance from month to month, then you want the lowest APR possible.

How do you cancel a credit card?

It’s important to cancel your old cards to avoid any additional fees. Unless you’re doing a balance transfer, you’ll need to pay the outstanding balance before you cancel your credit card. If you’ve opted for a card with reward points, make sure you redeem or transfer the points before you close your account. To avoid any bounced payments and save yourself an admin headache, redirect all your direct debits to a new card or account. Once you’ve done all the preparation, call your bank or credit card provider to get the cancellation underway. Once you receive a confirmation letter, destroy your card and make sure the numbers aren’t legible.

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.