Credit Card Trap

Credit Card Trap

You’ve turn 18 and congratulations, you now qualify for your first credit card. Your bank will likely send you a letter offering you your very own credit card account with a low limit of around $1,000. This letter may make it sound like you are already pre-approved, but you’re not. You still need to meet the eligibility requirements, but…

STOP!!! DON’T DO IT.

Why do you need it? If you don’t need to borrow money, why get a line of credit?

The most common mistakes are:

1. Lack of knowledge

The biggest issue is that many new credit card holders see it a ‘free money’ and they don’t need to pay it off till later. Getting a credit card is not an invitation to spend, however temping that may be.

The problem is, if you can’t afford that item now, what makes you think you can afford to pay for it later? Especially when the back adds their fees to it, making that sale but not so cheap anymore. Using a credit card for ‘little’ purchases quickly add up leading you to getting overwhelmed with repayments making it feel like you are trying to dig your way out of an ever-filling hole.

2. Not paying it off within interest free period

Every purchase you make is added to your balance with most companies having an interest-free grace where purchases do not start accumulating interest until a week or so after the statement period ends, which is when the monthly payment is due. If you pay off the entire balance by this date, you will not attract any interest. However, if you are unable to do this, you will start accruing interest at the card’s purchase rate. Now for the sting……. Any NEW purchases from now on will also start accruing interest from the day you make them with no interest-free period. This makes it harder to pay off your debt as purchase interest rates range from 12- 22%.

3. Attractive rewards

Banks are smart. They know how to entice you and make it really attractive through various reward programs with access to airport lounges, VIP events and cheaper shopping. Unfortunately, this bait comes with a hook. When you spend on unnecessary items to get access to these offers, you are spending money that you don’t actually have, and spending more than you have to get a small reward.

Most reward cards come with annual fees to be able to access the rewards. These fees start from as little as $49 to $415 each year. So really, you are paying to access the lounge or to get early access to ticket sales. It’s not free.

4. Building credit rating

Some banks encourage you to get a credit card to build your credit rating. Although this is true, it does help you, but it can also hinder you too. Failure to make the minimum payment will reduce your credit rating, as well as limit the amount of money you will be able to borrow for more important things like a house. See our blog from July 2019 Good vs bad debt for further details about your credit rating as just paying your phone bill and car rego on time also builds your credit rating.

5. I need it to travel

No, you don’t. Not in 2020. Most hotels and car rentals worldwide will allow you to use a debit card to make bookings. You can then pay any holding deposits with cash when you arrive. But having said that, most of the debit cards we already own are debit credit, meaning we have the access to feature of credit cards but we’re using our own money. You may need to notify your bank that you are preparing to travel so they are aware that international bookings are being made.

Although there are a number of attractive low rate credit card options, saving up first is always better than needing to borrow and then pay it off over time. There is a reason why there are 14,482,877 credit cards owned by Australians (March 2020) with a combined debt of $29 billion. Too many of us are unable to control those urges to shop with the average purchase amount being $103.88. The average credit card balance is $3,321 with it continue to accrue $1,951 worth of interest. Back in 1995, the average balance was on $874. We need to get back to a place where we are in control of our money and not controlled by the credit card debt.

Basically, if you don’t have the money in your pocket to cover it now, maybe you don’t really need it.

Developing your financial literacy will give you the freedom to achieve your life goals.

* All statistics sourced from the RBA