Tips and traps of credit

Starting out with a HECS debt is bad enough, but abusing a credit card can also mean trouble. Admittedly it’s tempting to spend with interest rates at current levels, but most credit cards still have double-digit rates.

Of course a card is useful when you don’t have ready cash, but unless you pay off the balance in full each month the interest costs add up.

Credit card statements today must show how long it will take to repay the debt, and how much extra interest you pay if you only make the minimum payment each month. The MoneySmart calculator is also a useful tool to show you how much more you owe on your card.

Running up large credit card debt can result in a poor credit rating that can come back to bite you down the track.

For instance, if you are just five days late in paying your credit card, this fact may be noted on your credit file. If you are 60 days late in paying any form of credit, then you may be issued with a default or other negative listing. That does not sit well when applying for a mortgage.

It is estimated that the average household credit card debt for the 56 per cent of Gen Y’s who have credit cards is $6,000. Much of this is lifestyle debt – money spent on clothes, entertainment and holidays rather than appreciable assets like property. For Gen Y’s wanting to get ahead financially, the first step is to pay down a credit card. This will help provide space in a personal budget to think about starting a regular savings plan.

Interest-free store deals

Interest-free store deals can prove lethal, they are not free with both fees and charges attached. If the purchase balance is not paid in full within the interest-free period, you will be charged interest on the outstanding balance at rates that can be close to 30 per cent. In some cases, the interest may revert to when you first made the purchase. Paying huge interest costs on a depreciating asset long past its prime is a wasted effort.

Amalgamating all your debt into the one account and then paying a lower overall interest rate may be an option but this also has a downside as it may mean extending the repayment of what was previously a short-term debt over a longer period, which can cost you more in interest.

There is no doubt credit cards can play an important role in life, but you need to make sure they are working for you and not the other way round. If you are concerned, speak to an adviser about getting a savings plan in place today.

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Zac Zacharia (Managing Director) has been assisting clients to create wealth and secure their futures for over 14 years.

He is also an accomplished presenter and educator

Co-authoring the popular investment book, Property vs Shares.