
Get exclusive money-saving offers and guides
Straight to your inbox
Updated
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
Your credit card can be a blessing or a curse. It can earn you rewards points so that you can get more value from paying with plastic. It can be your “get out of jail free” card in emergency situations. But if a credit card is carelessly used, it can also be your highway to insurmountable debt. Since this is something we all wish to avoid, here’s a list that will help you avoid falling into a credit card debt trap.
Let’s start with an obvious example of what not to do with your credit card. Cash advances should be avoided at all costs. They are interest magnets. Cash advances typically come with a higher interest rate than purchases and a cash advance fee. They also have no interest-free days. This means if you use a credit card to withdraw money from an ATM, you’ll be charged interest from that day until you pay off your balance.
Most credit cards will process mortgage payments as cash advances. This means if you decide to make a mortgage payment with your credit card, you will be charged an interest rate of around 19-22% (depending on your card’s cash advance interest rate). That's not going to look pretty later on if you can’t pay down your full account balance anytime soon.
If gambling on credit is not a good idea, gambling with your credit card is doubly unwise because gambling transactions are also considered to be cash advances. What could be worse than losing money at the tables? How about having to pay a fifth more in interest on all your losses? Talk about rubbing salt in the wound.
Even if you’re not gambling, having dinner and drinks at the casino can also be considered as a “gambling transaction” and, in turn, constitute a cash advance. Innocent as it may be, if you should mistakenly charge your casino refreshments to your credit card, this expense could attract interest charges at the cash advance interest rate until your card balance is clear.
While your credit card may be a real saving grace in emergency medical situations, be careful how you deal with the matter afterwards. Submitting insurance claims is ideal, and could allow you to quickly pay off your credit crd balance. But in the event that you’re not covered, those hospital bills can become extremely expensive if left unchecked on your credit card. The last thing you want is mounting interest fees on top of your medical fees.
We all need that much-deserved break every so often, but putting your entire vacation on plastic is far from ideal. Unless you know you can afford to pay it all back before interest starts accruing, charging your whole vacation to your credit card could leave you with months or years worth of debt.
Some government charges and fines are processed as cash advances on credit cards. This can apply to other things like telco and utility bills as well. Note that some companies may also impose a 2-5% surcharge for paying your bill with a credit card. Some credit cards do allow you to earn rewards points on ATO payments, but these are becoming less common.
Again, these are cash equivalents and are considered cash advances. You will incur interest (and possibly a cash advance fee) from the time of purchase and you will carry the accruing interest for as long as you carry a balance on the account.
Learn more about cash advances
Charging your new car to your credit card is a risky move, since it would probably put you far closer to your credit limit than is comfortable. If you max out your card, this could result in penalty fees and a black mark on your credit report. Similarly, if you struggle to repay the monthly repayments on such a large purchase, you could end up with late payment notices or defaults that hurt your credit score. Your card issuer won’t be pleased with you either way. Plus, carrying such a high balance on your credit card elevates your credit utilisation ratio, which also hurts your credit score.
Credit ratings: What is “good credit” and “bad credit”?
Attempting to furnish your new home with your credit card is similar to buying a new car with it. The trouble with charging these big ticket items to credit is that you tend to spend more when you swipe. You’d think twice about paying $2,000 for that swanky new washing machine if you had to dish out your own cash for it.
Putting big ticket items on your credit card also increases your risks of maxing it out and hurting your credit score with missed payments – not to mention the cost of interest that could accrue over time. If you do decide to put big ticket items on your credit card, make sure you’ve made the calculations in advance so you know exactly how much you’ll have to pay each month to avoid unmanageable interest charges.
Ultimately, the rule of thumb is not to get caught carrying a debt or interest charges that you can’t easily shake off. This doesn’t mean you should avoid using your credit card altogether. It just means that you should only use it when you’re able to repay your monthly balance, preferably in full.
Image: Shutterstock
Back to topWith bonus Qantas Points and a range of complimentary insurance covers, the Westpac Altitude Platinum - Qantas is worth considering if you want more frequent flyer points.
Earn Altitude rewards with Westpac’s Altitude Platinum credit card, while enjoying the benefits and privileges of platinum status.
Get $250 credit back when you meet the eligibility requirements and 55 days interest-free on purchases.
Pay no interest on your credit card debt and clear it faster with a 0% balance transfer credit card. Compare and apply here.
The ANZ Rewards Platinum Credit Card offers a competitive rewards program, $0 annual fee for the first year, a $500 gift card, a balance transfer offer and a range of complimentary insurance covers.
Available to Woolworths Group employees and family, this low-cost card comes with simple features and mobile payment options.
SPONSORED: In a time of financial volatility, here are the key ways to find a credit card that offers you bang for your buck.
This low rate credit card has a $0 annual fee and is available to firefighters and other service workers or volunteers.
A low rate platinum credit card that includes a cashback offer and perks such as complimentary travel insurance and purchase insurance.
The BankSA Vertigo Platinum card offers a $300 cashback a low ongoing purchase rate and a range of complimentary insurance covers.