We love to rely on credit here in Australia.
Indeed, as of January this year, there were some 13,152,514 credit cards in Australia, with the average balance per card at $2,721. Credit cards don’t just enable users to splash out on something that might otherwise be out of their reach. These pocket-sized enablers are used for everything from financially managing emergencies, earning reward points and paying off debt to covering for an unexpected and sudden loss of income, getting a credit rating and, of course, making a big purchase that is otherwise out of reach.
As financial planners, we naturally err on the side of caution when taking out credit. Doing so can help you get a step ahead, sure. However, the adage “nothing in life comes free” rings particularly loud and true in this instance. It is therefore important to understand what you’re getting into, how to avoid the pitfalls and make credit work for you, not against you.
So, with that in mind, we want to share some of the most common misconceptions, questions and pitfalls that our clients encounter before they come to us.
What is a credit card?
Given how prolific credit cards are, this question sounds almost ridiculous, we agree.
Nonetheless, it can be sobering to ask it and think about the answer. A credit card is a channel to someone else’s money. Although the card may be in your possession, the funds from which it draws belong to a third party, such as a bank or lender. In other words, it’s money you don’t actually have.
Understand all associated fees and interest rates before applying for a credit card
They might seem like a generous bunch at face value, but you can expect a combination of any of the following fees and fines from credit card lenders:
Late payment penalties
Foreign purchase transaction fees
Cash advance charges
Returned payment fees
Balance transfer fees (the cost to transfer your existing debt from another lender into this credit card)
This is where your ActOn wealth wingman can really step up for you. We have a near-forensic understanding of credit card options in the market and can quickly help you identify all costs, so you enter this with eyes wide open and avoid them right from the start.
Never miss a credit card repayment deadline
This is one of the golden rules, as the consequences can be dire, even if the amount owing is trivial.
Failing to make a deadline will trigger an immediate problem by way of instant (usually steep) fees. However, the much bigger problem is the long-term effect. Whether we like it or not, we are all attached to a credit rating. This is essentially a system that scores us on our ability to repay monies owed.
From mortgages to cars to white goods, lenders access this score to assess your risk profile. The score helps them determine a) whether or not they will loan money to us in the first place and b) how much they will loan. A poor credit rating is a red flag and can haunt you for years.
Don’t max out your credit card
Maxing out your credit card should be avoided at all costs. It signals to credit bureaus that you might be over your head.
Lenders like to see consistent activity. A good rule of thumb is to never use more than 30% of your credit limit and make regular repayments.
Pay back more than the minimum owing on your credit card
We just mentioned that it is good to make regular repayments. It is even better if those payments are more than the minimum owing.
Each month, your credit provider will issue a statement that details how much credit you have used. The statement will outline a minimum amount owing, and your aim should always be to hit well over that target. Why? Doing so will minimise the level of interest you incur on the loan and help you end your debt sooner rather than later.
Leverage all the rewards and points you can!
It’s important you make your credit card work as hard as possible for you. Make sure you avail of all possible rewards and points linked to the card.
Again, ActOn Wealth is here to give you some really good tips depending on the card ultimately selected. Using your credit card could mean free travel insurance, shopping vouchers, frequent flyer points and other retail discounts. So let’s make sure you’re getting credit and plenty of added value as well!
Are you in over your head with credit card debt?
First thing is first - you’re not alone.
Your ActOn Wealth wingman is not here to judge - we’re here to help get you out of hot water (if you’re in it) and back to growing your wealth. So, if you’re feeling overwhelmed or confused about your credit, contact us. We’ve helped countless clients out of sticky situations, and we will know how to help you.
Contact ActOn Wealth about credit cards and credit rating today
We know the whole topic of money lending can seem like a slippery slope. The number one rule is to never seek credit without doing all the necessary homework. To that end, we’re here to wade through a considerable amount of that work, as we already have a wealth of information and understanding to share with you.
So, let’s take a breather, look at this with a cool head and find the best solution for you. Who knows, it might even avoid credit altogether! The point is we will find the best path to wealth building for you. Contact our friendly team for a no-cost, no-commitment catch-up and let’s look at your credit challenge together.