How to avoid financial disasters

How to avoid financial disasters

From over-spending to racking up a massive debt or falling victim to a financial scam, financial disasters come in all sorts of forms.

Here are some valuable tips to help you avoid financial disasters of all kinds.

Budget basics

Budgeting is a necessity, according to Steve Crawford, Director of Experience Wealth Advice. Setting out your income and expenses ­– regular (rent or mortgage, groceries, utilities bills) and irregular (insurance payments, clothing, car maintenance) – is the first step in ensuring you are in control of your finances.

Creating a budget may seem like a daunting task but smartphones and the internet have made the task easier than ever.

“Every bank has their own online free budgeting program on their website, and there are more than 15,000 budgeting apps available. There are no excuses; you don’t need to be an Excel wizard – you just need to commit to small steps,” Crawford adds. 

Spend less

Spending less than you earn sounds obvious, but not everybody does it. Crawford suggests breaking down your expenses into timeframes that make sense to you.

“If you break it down into 12 months of the year, you can save for 10 months by spending less than you earn and spend more in the other two months – one month might be a holiday, the other might be Christmas,” he says.

“If 10 months out of 12 you’re winning, it will compensate for the other two.”

But being disciplined about it is the key. Work it into your budget so you can keep track of when a saving month is and when you can spend a little bit more. 

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Cash reserve

Living pay cheque to pay cheque can leave you vulnerable in financial emergencies and tip you into disaster from which it can be hard to recover. Greg Pride, financial adviser with Centric Wealth, recommends setting aside a small amount each month in savings to act as a “cash reserve” if unplanned expenses crop up.

“You need a little buffer to make sure you can deal with unforeseen events,” advises Pride.

Look for high-interest savings accounts, which reward regular deposits and charge lower fees, and aim to save up around $5000 to help handle life’s curveballs.

Debt control

There are unavoidable debts (mortgage) and then there are get-out-quick debts (credit cards). Interest on credit cards can be as high as 20 percent or more, so if you only pay the minimum each month you end up paying a lot more than the original purchase and can get trapped in a cycle of ongoing debt.

Try to pay off the full balance of your credit card each month and pay any other debt, such as personal loans or other lines of credit, as fast as you can to avoid an interest blow out. If you can, it’s also a good idea to make extra repayments on your home loan to reduce the interest you pay and shave years off your mortgage.

If you find yourself in a bit of a debt hole with your credit card, consider a balance transfer credit card, or a low-rate personal loan to help you get the debt under control.

RateCity currently lists a number of 0 percent balance transfer credit cards. These aren’t a get out of jail free card though, and many have higher revert rates, so it’s important to read the fine print on balance transfer deals.

Scam alert

“If it looks too good to be true, it probably is,” says Crawford, advising to steer clear of get-rich-quick schemes or other overly generous offers of wealth creation.

He cites the example of a newspaper ad by a property company he recently spotted, promising willing participants a debt-free existence within six years, no reduction in income and $3 million in debt-free assets. “You have to ask what’s in it for them,” he adds.

If it seems fishy do your research before committing any money to the suspect organisation. Similarly, with lenders offering easy credit with no credit checks, you can bet they’re not doing it out of the kindness of their hearts. Avoid taking out these kinds of loans as the interest rates will chain you further into debt.
 

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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 get rid of credit card debt

  1. Calculate your debt. Credit card calculators make it easy to determine the repayments required to chip away at your debt in the shortest timeframe possible for your budget.
  2. Repayment plans. Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
  3. Talk to your credit provider. If you’re still struggling with your debt, give your credit provider a call. You may be able to come to a new arrangement.

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 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.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here

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.

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 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.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

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.

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 apply for a credit card?

You can apply for a credit card online, over the phone or in person at the bank. Once you’ve compared the current credit card offers, the application process is quick and easy. Before you get your application started, you’ll need to gather your personal information like proof of ID, payslips and bank statements, proof of employment and details of your income, assets and liabilities. To be eligible for a credit card, you’ll need to be an Australian citizen over 18 and earn a minimum of $15,000 each year. Once you’ve applied for a credit card, you should get a response fairly instantly. If your credit card application has been approved, you should receive a welcome pack with your new credit card within 10-15 days.

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.