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 to costly debt when you cannot afford to repay your balance.
So, how do you avoid walking down a path of debt with a credit card? By familiarising yourself with common credit card traps to avoid.
Here are five of the most common mistakes Australians make when it comes to credit cards.
Credit card traps to avoid
Paying the bare minimum
Unlike a personal loan that requires you to make consistent repayments over a fixed period, credit cards only require you make minimum repayments - typically 2% of the balance or $20, whichever is higher.
By paying the minimum, you will not cover your full interest payments, and you will 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.
Paying only the minimum can blow up a small credit card debt by thousands of dollars and extra years of repayments.
A cash advance is when you withdraw cash using your credit card. 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 – sometimes as high as 20-30%.
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 available everywhere from cafes to clothes shops, there’s really no need to be falling into such a costly trap.
Most credit cards offer low interest rates for a short period of time to entice you to sign up. These introductory rates last for up to 12 months before they rise to the standard rate. However, with 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.
Balance transfer cards
A balance transfer credit card may offer customers much needed breathing room to repay a credit card debt over a fixed period (anywhere from six months to two years) with 0% interest. However, some card users fall into the trap of thinking a balance transfer credit card can be used like your standard credit card.
While the balance you may transfer on to this credit card is charged 0% interest during the balance transfer period, any new payments you make will be immediately hit with interest charges. The standard interest rate is typically much higher than average as well, meaning you can quickly accrue a new, bigger debt without realising.
It is recommended that you lock your balance transfer card in a drawer, or even hide in your freezer, so as to reduce the temptation to use it while you pay off your debt during the 0% interest free period.
In addition to an 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.
If avoiding ongoing fees is a priority for you, it may be worth comparing your options carefully and opting for a low- or fee-free credit card. Just keep in mind that platinum or rewards credit cards typically come with higher ongoing fees to help cover the cost of the generous perks and benefits offered.