Credit cards can be useful and rewarding when used properly, but be sure you're not making these common errors.
There are many advantages to having a credit card but when used improperly, you can easily become mired in something very costly that has grown out of your control. Learn about the common mistakes people make and take note of these best practices to get the most from your credit card.
Credit card mistakes & best practices
As useful as credit cards can be, anyone making the following credit card mistakes is going to cost themselves money and may even land themselves in some serious financial difficulties. Pay attention to the best practices to make sure you're maximising the benefits of your credit card.
|Common Mistake||Best Practice|
|Paying interest - If you spend more than what you can pay off each month, you will be charged interest on your purchases, and interest is just money down the drain. Interest compounds and grows quickly, meaning that if you're not careful it doesn't take long to get into unmanageable debt with a credit card.||Pay the balance - Pay off your entire statement balance each month. This way you can enjoy the perks of a credit card without the unnecessary expense of interest.|
|Making cash-equivalent transactions - When you take cash out of an ATM or make gambling transactions on your credit card, you will almost always be charged a cash advance fee and interest will accrue at the higher cash advance rate starting from the day you make the transaction.||Use cash or a debit card - Unless it's an emergency, don't use your credit card for cash-equivalent transactions. If it is an emergency and you do need to do so, pay it off as soon as you can to avoid as much of the financial penalty as you can.|
|Spending for rewards - Credit cards entice you to spend more with bonus points and rewards for your spending. It's tempting to buy things you don't need or haven't budgeted for when points are in the picture.||Spend within your budget - Buy what you need and what you have budgeted for. If you're paying more for the card than what you're earning in rewards, consider a card more suited to your budget and spending style.|
|Holding too many credit cards - Not only can you easily lose track of your spending, but your overall creditworthiness will be reduced, meaning other lenders may be reluctant to loan you money when you really need it.||Keep one or two - Choose which credit card(s) serve you best and cancel the rest. You'll be able to keep track of your spending make the most of your cards and related perks.|
|Maxing out your credit card - Spending right up to your credit limit can make you look like a risky borrower and may decrease your creditworthiness and cost you overdraft fees.||Pay down part of your balance - You don't have to wait for your statement to arrive to pay off some of your balance. Pay some of it down before you add more charges to keep you from maxing out.|
|Keeping a high-interest debt - If you've racked up credit card debt and are struggling to pay it off, keeping it on a high-interest credit card can cost you an unnecessarily high amount of interest.||Balance transfer to a 0% card - Transfer your high-interest debt to a new credit card that offers low or 0% interest on balance transfers and pay off your debt over a longer period of time and save on interest.|
|Not immediately reporting a lost or stolen card - If you've misplaced your credit card or suspect it may have been stolen, it is your responsibility to take action. Not doing so could at best create a major headache, or at worst leave you liable for fraudulent transactions.||Call your bank or issuer - Even if you find it in later in an old jean pocket, it is safer to call your bank and let them know. Sometimes you can block the credit card without having to completely cancel it.|
|Not checking your statements and recent transactions - Pay with plastic and you can bury the price and repayment deep in your mind, and adapt a ‘pay now, worry later’ attitude.||Pay attention - Most credit cards these days are linked to banking apps accessible on your smartphone. Periodically check your transactions to stay on top of your balance and pick up on any unnecessary or fraudulent transactions.|
|Avoiding the fine print - Credit card companies are counting on you not reading or not fully understanding the product. When this happens you will likely end up being charged interest or penalties, or not receiving an offer you were expecting to get.||Do your research - Read through the terms and conditions, check out product reviews or call the bank to ask questions. Make sure you understand what you're getting, how to get it and what you need to pay.|
|Failing to compare credit card offers - There are hundreds of credit cards on the Australian market and choosing one without doing your research could lead to a rejected application or the acquisition of a credit card that doesn't suit you.||Carefully compare your options - Make sure to consider the annual fee, interest rate, promotional offers, any rewards schemes and other perks like travel insurance or purchase protection.|
Mistakes to avoid when doing a balance transfer
Cardholders saddled with high interest debt on their existing credit cards look to balance transfer deals to alleviate the burden of interest payments. While there are plenty of offers on the market to choose from, it inherently means there is a higher chance of not choosing the best offer for you. Here is a list of the most common balance transfer mistakes so that you know what to avoid.
- Not doing enough research pre-application
There are tons of balance transfers on the market and you need to make sure you choose the right one for your debt amount, creditworthiness and circumstances. To compare offers make sure you consider these 6 primary factors:
- The balance transfer interest rate. The interest rate you'll pay during the balance transfer period (usually 0% to 5% p.a.).
- The balance transfer period. How long the balance transfer interest rate applies (usually 6 - 24 months).
- The balance transfer revert rate. The interest rate your transferred debt with attract after the balance transfer period expires (usually the cash advance rate).
- The balance transfer fee. The fee, charged as a percentage of the transferred amount, you'll have to pay to move your debt to a new card (usually 1 - 3%).
- The annual fee. The amount you'll be charged each year to hold the credit card, including any introductory promotions, whether you transfer a balance or not (usually around $90).
- What is considered an eligible debt. You cannot transfer debts between credit cards from the same issuer or cards not issued in Australia. Make sure the debt you want to transfer is eligible to be applied to the new card.
- Not making the transfer in time
Most balance transfer cards offering an introductory balance transfer rate require that you complete the balance transfer at the time of application to take advantage. Otherwise, there may be a small window to initiate the transfer, usually about a month from the activation of your new card. If you fail to specify the balance to be transferred within that time frame you will lose the opportunity to do so.
- Not maximising your repayments
If you take advantage of a 0% balance transfer interest rate for an introductory period, making only the minimum repayment of 3-5% will likely not get you out of debt in time. The best practice for paying off your entire balance transfer is to pay it off in equal amounts each month over the course of the balance transfer period.
Now that you're aware of the most common credit card and balance transfer mistakes you can start to fix the problem, mitigate any existing damage and find the right card for you.