Think twice before overspending at the Boxing Day sales

Think twice before overspending at the Boxing Day sales

Beware of the Boxing Day binge this sale season

Consumer advocate RateCity.com.au is warning Australians to keep track of their spending in the post-Christmas sales, with the national total expected to hit $19.5 billion, according to the Australian Retailers Association.

Last month’s ASIC report into the buy now, pay later sector found shoppers could get into trouble when using interest-free platforms such as Afterpay.

The report found in a 12-month period, 20 per cent of users went without essentials as a result of overspending using these platforms, while 15 per cent had to take out other loans to make ends meet.

RateCity.com.au research director Sally Tindall said this year’s Boxing Day sales would be unlike any other with more people opting to hit the shops from the comfort and safety of their own homes.

“If you’re planning to hit the sales online, keep a tally of what you spend. Lugging around shopping bags might be a pain but they’re a pretty good reminder of how much you’ve bought,” she said.

“It’s much easier to lose track of your shopping online. It only takes a few clicks to get yourself into hot water.

“Buy now, pay later platforms such as Afterpay might be interest-free, but they’ve still got the capacity to cause havoc on your finances if you end up overspending.

“If you’re putting your purchases on a credit card, make sure you can pay the total in full when your next bill comes in.

“The last thing you want is to start 2021 shackled in debt,” she said.

Tips if you are planning to use a credit card or a buy now pay later service in the sales:

  1. Give yourself a strict spending limit before you hit the sales.
  2. Don’t impulse buy. Delay any big-ticket items for at least 24 hours.
  3. Make sure you have enough money to pay your debt back before you get stung with fees or interest.
  4. If you’ve overspent, don’t be afraid to return some of your shopping.

Common buy now, pay later traps:

  1. Impulse buying – buy now, pay later platforms often encourage customers to keep shopping. Try and stick to buying things you actually need.
  2. Falling into overdraft – repayments on Afterpay are automatic, which means if you don’t have enough money in your account you could end up going into overdraft with your bank.
  3. Running out of money at the end of the month – ASIC found over a 12 mth period, 20 per cent of users didn’t have enough money to pay for essential items because they overspent.
  4. Using more than one platform at once – ASIC found people getting themselves in trouble were often using multiple forms of credit at once.

Common credit card traps:

  1. Not paying your balance in full every month – if you don’t pay your entire bill, you’ll lose your interest-free days and get hit with interest charges.
  2. Spending more to get points – if you’re spending more just to earn rewards points then your credit card might have gotten the better of you.
  3. Paying just the minimum – you could end up on a debt treadmill and have to fork out hundreds in interest.
  4. Using your entire credit limit – just because the bank has approved you for $10,000, doesn’t mean you should spend that much.

Afterpay vs average credit card

Product Where you can use it Free period (before interest or late fees) Interest rate Minimum repayments Annual fees Late fees Credit limit
Afterpay Affiliated retailers only up to 57 days None 4 payments over 6-8 wks None Max fee 25% per purchase or $68 whichever is lower. up to $2,000
Average credit card Anywhere Visa or Mastercard is accepted. up to 52 days. If you have a balance owing, interest applies from day 1.

16.40%

2.40%

$109

$19.50 a month $10K

Source: RateCity.com.au. The average credit card is based on the averages of each category in the RateCity.com.au credit card database.

Note: The Boxing Day spend forecast is based on combined research from the Australian Retailers Association and Roy Morgan.

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Learn more about credit cards

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.

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 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 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 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 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 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 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 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 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 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 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 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.

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.