According to a study from finder.com.au, 40% of Australians own one credit card, 19% own two credit cards and 8% own three or more. Unsurprisingly, cardholders with several cards were more likely to have bigger credit card debts than those with just one credit card. The study found that those with several cards carried on average $6,500 of credit card debt – more than double the national average.
However, credit cards are not necessarily a bad thing, says Prudential’s financial wellness advocate Tiffany Aliche. “It’s a myth that credit cards are innately bad,” she says. “Think of them instead like a tool, just like a hammer. You can pick that hammer up and build a house, or you can pick up that same hammer and destroy that same house. It depends entirely on the user.”
So, is there a method to the credit-card madness? We ask trusty financial experts for their top credit card dos and don’ts.
It’s a common belief that to have good credit, you need credit cards. The truth is yes… and no. Financial wellness advocate Felicity Aliche recommends keeping at least one but not more than three cards. “Remember, if you have no credit history, you are a bad borrower,” she says. “It’s just like if my 16-year-old relative said, ‘Look, I’ve never been in an accident,’ yet she’s never driven a car, so therefore she’s a bad driver. Well, the same goes for credit.”
However, that doesn’t mean you need to fill your wallet with plastic in order to have good credit, either. “Because the word ‘credit’ is in credit cards, people associate the two, but your credit score is about much more than that,” she says. “Your credit score encompasses many more aspects than cards. It’s about any time you borrow and pay back money, whether it’s a mortgage, car loan, student loan, even your utility bills.”
“I’m not a fan of department store credit cards for two reasons,” says Michael Foguth, founder of Foguth Financial Group. “For one thing, the revolving interest rate is typically highest on those department store cards. For another thing, limiting where you can use a particular card has downsides.” Instead, he recommends sticking to one card that offers rewards and using that for every credit-card purchase.
You could be paying your monthly credit card bill on time, but if you’re continually carrying a high balance, that will bring your credit score down. “Think of 30% as your new maximum, and realise that anything above that is going to tank your score,” says Aliche. Gearing up for a big purchase, like a home or car? Then aim for 15%, she says.
Now that debit cards are as common as cash, we’ve become a swipe-and-go society. “It’s easy, though, to forget that every time you swipe your credit card, you’re taking out a loan,” says Aliche. “When you look at it that way, it changes your perception about credit cards and makes you think twice before automatically swiping away.”
Interest rates may be low for those with a mortgage, but credit card interest rates haven’t moved much. However, that doesn’t mean you shouldn’t look for a lower rate. Let’s say you bring your interest rate down from 20% to 15%. That means for every $100, $20 is going to interest and fees, versus $15. That’s quite an amount over a period of time. “That’s why I suggest that people regularly negotiate their rate. Pick a date every year that you spend on negotiating your fee, and you may be surprised how easy it can be to lower it,” says Aliche. Better still, try and pay off the whole amount each month so you don’t pay any interest at all.
“I used to say credit cards were the devil, and I changed my stance on that, but now I am here to tell you that cash advances are the devil,” says Aliche. “First of all, the interest rate is so bad, it’s lose-lose-lose. And chances are, if you need a cash advance, you’re not likely in the position to pay it back.”
According to the Australian Tax Office, if you need cash for a medical condition or severe financial hardship, you may be able to access money in your Superannuation. “At least when you pay it back, you’re paying it to yourself,” says Aliche.
Credit card apps make it easier than ever to pay on the go rather than wait for a paper statement. Foguth suggests using technology to your advantage and pay your credit card bill every two weeks rather than every month. “That way, you never have a balance carried to the next month, and there’s not a daunting number at the end of the month, which makes it easier to ensure you aren’t racking up a huge number that you can’t pay off at the end of those 30 days,” he says.
Drive a lot? Then a service station card is a smart idea. Family grocery bill adding up? Get a grocery card. “For me, I travel a lot, so I use a travel card where I get extra points and cash back for any travel,” says Aliche. “Get a credit card that aligns with how you navigate your life, one with rewards so you are getting cash back for purchases you make frequently anyway.”
Spending too much on groceries? Here are 19 tricks to save less on groceries.
Cashback credit cards are fairly new to Australia so it’s crucial to understand your money reward options before choosing that new piece of plastic to sit in your wallet, says mozo.com.au.
Cash back credit cards work in a similar way to reward credit cards like platinum and frequent flyer cards: every time you use your card to buy something you earn reward points which you then redeem for products or flights. However, with cash back cards your points are converted into cash.
“I’m a big believer in cash-back cards,” says Foguth. “I put everything – petrol, restaurants, you name it – on one credit card that offers cashback. Even if I get 1% cashback, that’s 1% more than if I used a $100 note in my pocket,” he says.
Here are another 5 ways you can save money by using a credit card.
Any discussion of credit and finances isn’t complete without discussing the emotional components of it. Fear, shame and guilt over financial mistakes can actually prevent you from seeing solutions that may be right in front of you. “Trust me, I’ve made just about every financial mistake you can make, and I’m on the other side now,” says Aliche. “But first, I had to let go of fear and shame in order to get to those solutions. We’re so hard on ourselves when we’re learning financial things, so I tell people to be a paper-towel person. If you spill something, for example, you can either beat yourself up over it, or you can get a paper towel and clean it up, like you are going to do anyway. This made a big difference for me.”
Have a big purchase in mind? Put it on your card – and pay it off in full – rather than use cash, suggests Foguth. “That way, you’re getting all the rewards on that big purchase, and you are also showing that you’re a good borrower, so you’re getting cash back and helping your credit score simply for paying by credit card.”
Have your attention? Good. Because our experts agree that if you are going to choose between retirement savings or paying off debt, tackle the plastic first. “I know it sounds counter-intuitive, but listen to this: I have clients who have $1 million in retirement savings and $40,000 in revolving credit card debt that they’re paying interest on. This means that if they stopped saving money for retirement for 6 to 12 months, say, they’d be debt-free and save themselves the interest that they were paying on their credit card. Think about it, if you save yourself 10% interest with your credit card company, that’s the same as making 10% on your investment,” he says.
Sign up here to get Reader’s Digest’s favourite stories sent straight to your inbox!