If you've been reading my articles, you would know that recently I have been writing about some more general life skills topics such as how to overcome procrastination and instant gratification. As I am both a Life and Financial Coach, I also like to throw in a few tidbits about finance and money management to help you get the most out of your money, so that you can live the life you want to lead. After all, if you are not making money from the banks, they are almost certainly making money from you! So this week and next, I have decided to write about credit cards. Specifically, this week about whether your credit card is the right one for you.
Like most other Australians, I have been bombarded with offers to get a new credit card or increase my limit recently. I bet you have too? With the Government cracking down on unsolicited offers, financial institutions have had one last opportunity to entice Aussies into debt before the looming deadline of July 1. One of the things you may have noticed is that there is a vast array of types of credit cards out there with differing reward schemes, interest rates and interest free or reduced interest periods. You may think that it is too difficult to change credit cards or even the financial institution that you currently use for your credit, but if it could save you potentially hundreds or provide you with rewards that you will actually use, it may be worth it. So how do you choose?
Firstly, you need to consider your credit habits . Do you buy most things with your credit card and pay it off before the interest charges kick in? Do you use your credit card only occasionally and still pay it off each month? Or do you typically rollover some or most of your credit into the next monthly cycle and incur interest?
If you buy most things on your credit card and pay it off before you incur interest, the interest rate may not be your biggest concern. You could, potentially, be earning lots of rewards though. As a general rule of thumb, credit cards offering reward schemes often have higher interest rates and annual fees, but if you pay it off, do not incur the interest, and use it regularly, your rewards could outweigh the annual fees. The most popular reward scheme is frequent flyer miles, however there are other schemes offering gifts, shopping vouchers or even petrol discounts, and sometimes you can even swap your frequent flyer miles for gifts and vouchers should you wish. Do the math and work out whether the reward for you outweighs the fees.
If you only use your credit card occasionally, but still pay it off each month, the rewards may not outweigh the card costs. Once again, do the math based on your typical spend to find out. If the card fees are more than the rewards, you could consider cards with no annual fee. Some of these still offer rewards, but they tend to be less.
If you typically rollover some or most of your credit and incur the interest, the interest rate may be your deciding factor. Interest on credit cards can vary from less than 10% per annum to over 19% per annum. The interest rate can make a huge difference to the minimum monthly repayment amount and even more importantly the ease and speed with which you can pay it off. For example, if you owe $10,000 on a credit card at 19% interest and only make the minimum repayments, based on a 2% minimum repayment, you will pay $36,676 in interest and it will take 68 years and8 months to pay it off. Whereas, if you owed the same amount on a credit card at 12% interest and the same minimum repayment, you will pay $9,704 in interest and it will take 30 years and 9 months to repay the debt . Use this fabulous and free credit card calculator to do your own sums.
Other things you may want to consider are:
1. The number of interest free days on purchases. Most credit cards offer a number of interest free days on all purchases. The number of days is normally described as 'up to' a certain number of days. This means that if you have a credit card with a 30 days interest free period and you purchased an item 20 days into the billing cycle, you have 10 days interest free on that purchase, or up to the end of that same billing period. Note, this does not apply to cash advances.
2. Late payment penalties. If you sometimes make a late payment, what is the late fee? Or is an increased interest rate used as a penalty? This can sometimes be more than double the normal interest rate, even if late by only one day.
3. 0% balance transfer. Something to consider if you are thinking of changing credit cards and have a reasonable amount owing.
4. Insurance
services. For example free travel insurance
when you book using your credit card. If you travel a lot this may be of value to you. Remember to check whether they include 24 hour emergency services.
5. Additional card holders allowed. Do you want to share the same credit card with your loved ones?
6. And finally, Internet banking. People are moving more and more into the virtual world to organise their finances. Is this important to you?
Kristina Plimer is the highly qualified founder and head coach at Bluesky Coaching Sydney www.blueskycoachingsydney.com.au Kristina holds a Bachelor of Science (Honours) in Applied Psychology from the University of Wales, Cardiff (ranked in the top 5 of all UK universities for Psychology at the time), a Diploma of NLP and Coaching, and a Certificate of Hypnosis, amongst others. Kristina is also an NLP Master Practitioner, Psychotherapist, Time Based Therapist and Family Group Conference Facilitator.