As a savings specialist, we are well aware of the debt creating dangers of credit cards. It’s easy to rack up a sizeable backlog of payments if not managed carefully. Guest financial writer Peter Wood, talks to us about the other side of the credit card.
Are Australians discovering new credit card habits that encourage us to save more money? Or, better yet, can the latest credit cards, with better rewards and cut throat competition for the lowest rates, actually help boost those savings?
Unfortunately for those in the red, there may never be a credit card that performs well enough to make incurring interest on the average credit card balance of $3256 worth your while.
A few good cards
According to Canstar’s senior research analyst, Mitchell Watson, the right habits can cut through credit card doom and gloom.
“There definitely is such a thing as a good credit card, but what makes them good is the person using it, the way they use it and whether it’s the right credit card for them,” says Watson.
Fewer types of users than you think
Although tailored credit card marketing might have you believing otherwise, credit card users are split into just two categories: those who spend/revolve and those who spend/repay their debt each month.
“If someone is caught in that spending revolution, they need to be using a card that has low interest as well as low fees so they can start to pay off their debt. You can come unstuck quite quickly if you choose the wrong card. Some of the credit card interest rates available at the moment are around 22 per cent, and those in that cycle of spend/revolve should be looking for something around 9 per cent.”
A decade of debt
Let’s consider the fine print on all credit card agreements. The law demands there is always an explanation of how long “minimum repayments” will take to close your debt. And while most consumers are aware of the dangers of lingering balances, it may be surprising to discover your debt can follow you for an entire decade.
No amount of free flights or shopping kickbacks can make up for 10 years of debt from these minimum repayment traps.
Users on the hunt for the greatest benefits and rewards from credit cards may find their interest rate falls near the top end of the current scale. Chasing credit card rewards could also be a strategy destined for failure considering average-income users’ rewards take longer to kick in.
According to Watson, someone who spends $12,000 a year on their card, even when clearing that debt each month, will find a limited number of cards that actually pay back.
“You need to be looking at where you spend your money and how much you spend to see any benefit. As a general rule, it’s not until you are spending $16,000 to $18,000 a year on your credit card that any benefit starts.”
A “good credit card” is simply an option that allows the individual to clear their debt every month. If you are in that cycle of spend/revolve, both minimum repayments and pouring money into your card can trip you up.
Strategise repayments within your means, but remember to leave yourself some play money to stop you from hitting your credit again. It’s the only approach that applies to all cards, no matter what you spend.[Sources]