Over Christmas last year I spent some time back in Australia seeing family, friends and clients. During some of these meetings, it became quite clear to me that as consumers, we don’t pay enough attention to what’s really going on with our credit cards, and just how much they’re really costing us.
Gold, Titanium, Palladium, Platinum…chances are if there’s a precious metal that exists, there will be a credit card named after, and perhaps even made out of it. All are designed to provide us with a quick and seamless way to borrow money quickly to make transactions. Credit cards can be an excellent tool if used correctly, or lead to financial suicide if managed poorly.
To put it in perspective, credit card debt in Australia is approximately $32 billion, or $4,300 per card holder. Keep in mind, that’s not the credit limit, that’s how much is currently owing and incurring interest charges.
Before we get into some of the tips to reduce and eradicate your credit card, let’s take a look at some of the common myths:
“But my credit card gives me rewards and frequent flyer miles..”
This could be an excellent benefit if you’re a big spender, however if you’re spending approximately $12,000 per year, this is going to result in approximately $56 in annual rewards. With annual fees of anywhere from $100 – $500, you are almost guaranteed to be losing money.
“But I make regular repayments..”
Most people who make regular repayments are not clearing all of the outstanding debt on a regular basis. Let’s take a quick look at how the banks will typically deal with this. Let’s say for example that you owe $1,000 on your credit card and you make a repayment of $900, most credit card companies will charge you interest on the full $1,000 as you failed to repay the full amount. To rub salt in the wound, they will also likely backdate this interest charge for the full ‘interest free’ period if you didn’t repay it on time.
“But I’m on an introductory low rate card..”
Great, you’ve taken the first step to consolidate your credit card debt onto a low rate card. This can be an excellent tool to repay your credit card debt quickly, HOWEVER, you must read the fine print. While the interest rate on debt that is transferred, most of these companies will charge exorbitant interest rates on any new credit card purchases.
How do you choose the right credit card for you..?
If you’re well organised and pay off your credit card debt in full on a regular basis, then consider a card with low annual fees, reasonable FX rates if you like to travel and use your card overseas, a reasonable rewards program if you’re likely to spend more than $20,000 per year and a reasonable interest free period.
If you fall into the category of only making minimum repayments, it’s time to get on top of your credit card debt. First, make a note of your balances, the interest rates and how much you can afford to pay and how long it will take to get rid of all outstanding credit card debt. Second, identify the right low rate card to consolidate your credit card debt onto. Next, cut up the old cards as quickly as you can to avoid repeating the exercise. Finally, set about eradicating your credit card debt as quickly as possible.
Remember, if you have outstanding credit card debt that is charging you ~20% per annum in interest, this can be one of the best returns on investment you will ever make, by simply repaying your debt.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Independent Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
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Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.