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Beat the banks: sort your debt and savings

Checklist for week 3

Estimated completion time: 20 mins

  1. Make a plan to tackle your credit card debt.
  1. Give your home loan a health check.
  1. Ask your financial providers for a better deal.

If you can complete these three tasks by the end of the week, you will have taken giant strides towards getting on top of your debt.

Step 1: Make a plan to tackle credit card debt

Australians love their credit cards, with more than 16 million cards in circulation around the nation. However, as the 2018 finder State of the Credit Card Market Report shows, sometimes excessive spending on our cards can get us into financial trouble. The average credit card balance in Australia currently stands at $3,170, with $1,903 of the balance costing the cardholder interest.

finder also asked over 2,000 Aussies at what point they start to worry about their credit card debt. On average, $4,113 was the tipping point when most of those surveyed started to stress.

If your credit card debt is holding you back, here’s how to tackle it:

1. Understand compound interest

Compound interest involves the amount of interest you earn being calculated on the money you deposit and also on the interest you have already earned, allowing you to earn interest on interest. This is good news for money held in a savings account, but bad news when you have an outstanding credit card balance. The longer you have a balance owing on a credit card, the more interest you’ll end up paying back.

2. Know your credit card interest rate

With the exception of payday lenders and loan sharks, credit cards are one of the most expensive forms of credit we can get our hands on. The average credit card interest rate fluctuates from month to month, but is just under 17%. And if you use your credit card for a cash withdrawal, the average cash advance interest rate is 19.60%.

Check your latest credit card statement or log into your Internet banking portal to find out the purchase and cash advance rates that apply to your card – you might be surprised just how much your credit is costing you.

3. Learn how to read your credit card statement

At first glance, there’s a ton of information on your credit card statement. While all of this information is important, it can be difficult to distinguish the important stuff from the really important stuff.

Let’s take a look.

sample of account statement

You’ll find a box much like the one above at the top right of your statement. This is a monthly statement cycle, and the statement period is July 18, 2018 to August 19, 2018.

Here, you can see you have less than one month after each statement is issued to make the minimum repayment. If you went over your credit limit in the statement period, this would be reflected in the overlimit amount. You will also receive a due date to make this payment if this applies to you.

You must pay the minimum payment each month to stop your account from going into default and avoid the late payment fee. Moreover, interest charges will apply if you don’t pay your full balance each month.

sample of account summary

The next section shows how much of your balance you paid off in the previous statement period (total new credits), how much you spent on the card (total new debits) and the closing balance (your current debt on the card). You can also see your credit limit and your available credit here too, along with your purchase interest rate and cash advance rate.

sample of minimum repayment warning

Government reforms made it mandatory for credit card providers to show you how long it will take you to pay off your credit card debt if you just make the minimum repayment each month. This is an important warning, as if you only make the minimum required payment each month, you’re going to incur a heap of interest on your credit card debt. In some cases, it may not even be possible to pay off the balance.

The warning also shows you how much money you’ll be able to save in the long run by making more than the minimum payment each month. In this example, the cardholder could save $625.23 in interest charges.

The rest of your statement will outline your debits and credits to your account, provide information on how to make a payment to your account and will also detail any point earnings if you have a rewards credit card.

4. Pay more than the minimum payment each month

Now that you know the importance of paying down your credit card debt as quickly as possible, make an effort to transfer more than the minimum payment over to your card each month. Using your budget from last week, work out how much you can afford to pay off your card each month.

If you regularly miss making credit card repayments, you may want to set up a direct debit from a linked transaction or savings account. This will ensure that your statement is paid on time and that you avoid late payment fees.

5. Consider a balance transfer

Another great way to tackle credit card debt is to transfer your existing balance to a card that doesn’t charge any interest on balance transfers for a set introductory period. Interest-free periods on balance transfers can run for as long as 26 months, which should hopefully give you enough time to bring your debt under control.

However, when selecting a credit card for a balance transfer, make sure you consider its fees, purchase and cash advance interest rates, and what rate your balance transfer will revert to when the introductory period ends.

There are also limits on the amount each provider will allow you to transfer to their cards, so read the fine print closely.

6. Make the most of your interest-free days

The majority of credit cards come with a set number of interest-free days when you make a purchase on the card, but figuring out exactly how they work can be tricky.

Let’s say your card comes with up to 55 days interest-free. The important thing is to know when your statement period starts – for this example, we’ll assume it starts on the first of every month. Looking at the month of April:

  • April 1: the first day of your credit card statement,
  • April 30: the last day of your credit card statement,
  • May 25: the day your April credit card bill is due.

If you made a purchase on the 1st of April, you would not get charged any interest until the 25th of May:

  • If you make a $100 purchase on the 1st of April, you get 55 days interest-free,
  • If you make a $100 purchase on the 30th of April, you get 25 days interest-free.

Interest is charged on any outstanding balance. However, if you pay the entire balance by the 25th of May, you won’t incur any interest charges.

7. Consider setting up an emergency fund

The beauty of credit cards is that they give you fast access to the funds you need to pay for unexpected bills and emergency expenses. However, unless you pay off your balance before your interest-free days end, the size of your debt can grow quickly.

One way to avoid this is to set up a savings account specifically for emergencies. A “rainy-day” fund can help you pay for those unpleasant surprises that often seem to crop up out of nowhere all at once, like your car breaking down or your dog getting sick and needing expensive emergency treatment.

Instead of paying those unexpected bills with your credit card, you cover them out of your own pocket and don’t have to worry about accruing interest. We’ll explain the process of choosing a high-interest savings account in more detail in Week 5, so stay tuned.

Step 2: Give your home loan a health check

Don’t have a home loan? Skip ahead to Step 3.

Buying a home is probably the biggest financial decision you’ll ever make, so finding the right home loan is crucial.

However, your current home loan might not suit you as well as it did when you first signed up. First, your circumstances may have changed since you took out a mortgage – for example, perhaps you’ve been given a pay rise and can afford to make additional loan repayments.

Second, there could be a better deal elsewhere. If you’re stuck with a high interest rate, unnecessary fees and a loan that doesn’t offer all the features you want (like a redraw facility or an offset account), it could be worth your while to compare your options.

What are the features of your current home loan?

Take some time to consider your loan from all angles:

  • What is the interest rate?
  • How much do you pay in fees over the course of a year?
  • Does your loan have all the features you need, such as an offset account?
  • Can you make additional repayments if you want?
  • Are you paying extra for features you don’t use?
  • How would you rate the level of customer service provided by your bank?

Taking all this into account, how happy are you with your current mortgage?

How does your loan compare?

Now it’s time to see how your loan stacks up against products from other home loan providers. Use finder’s home loan comparison service as a starting point to find out what interest rates other providers are charging. How much do they charge in fees? Do they offer extra features your current loan doesn’t, such as a free redraw facility?

Refinancing your home loan

If you think you can find a better deal elsewhere, it’s time to consider refinancing your home loan. Shifting to a different lender can lead to huge rewards, including much better terms with lower fees and interest rates, but remember that you’ll also need to factor the cost of leaving your current loan into your calculations.

Because switching home loans is such a life-changing financial decision, it’s a good idea to consult an experienced mortgage broker for advice. A mortgage broker can sort through hundreds of home loans for you and find one that meets all your financial needs, leading you through the process from start to finish.

Step 3: Ask your financial providers for a better deal

Another way to save money is to ask for a better deal on all of your financial products. From personal loans and insurance to electricity bills and phone plans, you could be able to find a lower interest rate, reduced fees or get more services and features included for the same price.

Sometimes all you have to do is ask. Here’s how to go about it:

1. Prioritise and sort your providers

Make a list of all your financial providers and sort them in order of priority – for example, your home loan will likely be at the top of the list, while the services where you may only be able to access smaller savings (like your monthly phone and Internet charges) will be further towards the bottom.

Remember to include the following providers:

  • Loan and credit card
  • Insurance
  • Electricity, gas and water
  • Phone and Internet
  • Cable television
  • Phone and internet providers
  • Cable television providers

For each of these, jot down the products you have, the amount you pay each week/fortnight/month/quarter/year and the provider’s contact details.

2. Find out what you could be getting elsewhere

Next, research what other providers are offering to their customers. Are there home loans with lower interest rates, electricity providers with lower usage rates or phone companies that give you the exact same amount of data and calls for a much lower monthly cost than you’re currently being charged? How much could you potentially save by switching?

Use finder as the starting point for your search, and compare products from as many companies as possible. You may even notice that your current provider is offering new customers a much better deal than you’re getting – this is something you can use as ammunition when the time comes to negotiate a better deal.

3. Contact your providers

This is the part of the process that many people find intimidating, but don’t let your fear of an awkward conversation put you off. Financial institutions have whole divisions devoted to customer retention. If you tell your provider you’re thinking of leaving because you’ve found a better deal, they’ll likely either transfer you to a customer retention department or offer you a better deal themselves.

Here are a few tips to help you negotiate from a position of power:

  • Know the product. Make sure you’re prepared with in-depth knowledge of what you’re currently paying for, what features are offered and anything else relevant to the product you have. This will help you understand the deals you may be offered as part of your negotiations.
  • Ask and you shall receive. Sometimes the best result comes from a direct approach. If you choose this route, make sure you’ve prepared a list of reasons why you should receive a discount. You might like to mention your sparkling payment history, your many years as a customer and some of the better deals you’ve seen elsewher
  • Threaten to leave. If you’re genuinely ready to leave your existing provider, let this attitude come through in your negotiations. When you threaten to leave, let them know the reason why. Don’t be hostile or angry, but maintain a firm approach throughout.

To make this process even easier, we’ve included a couple of scripts below to give you a clearer idea of how you can negotiate a better deal. The savings you generate could make a huge difference to your overall financial situation, so don’t delay.

  • By the end of this week you should:

    • Have a plan to tackle your credit card debt
    • Know how to avoid credit card debt in the future
    • Review your home loan to check whether it meets your needs
    • Contact your financial providers to ask for a better deal

    Once you’ve ticked these goals off your list, it’s time to move on to cutting your costs. Next week we’ll take you through a range of simple everyday money hacks that’ll put more cash back in your hip pocket.

    Coming up next week...

    We’ll take you through a range of simple everyday money hacks that’ll put more cash back in your hip pocket.

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