Taming The Credit Card

Is your credit card a friend or foe? Provides pleasure or pain? Is a source of solace or source of grief? Inspires fear or comfort? Read on to discover more about your relationship with one of your important financial partners – the Visa, MasterCard, AMEX or GE Creditline! This is a relationship that will always be close to your heart – or at least your wallet.

Know Your Credit Card Personality (CCP)

To start using your credit card wisely, find out your credit card personality. Are you a revolver or transactor?

A transactor is someone who pays off the entirety of the credit card balance by the due date each month, thus not incurring interest. They make full use of any interest free period for purchases. They do not take cash advances on their credit card as there is no interest free period for cash advances.

A revolver uses the credit card as a revolving line of credit where only a portion of the balance is paid each month. Many revolvers may in fact only pay the minimum required amount each month, as little as 3% of the balance. Since revolvers always have a balance owing, they are never entitled to interest free periods.

How much difference is there between credit cards?

There is a lot of difference! Knowing your own credit card personality is important because it can help find the most suitable credit card for you. These days credit cards have many features whose terms vary from card to card. Different terms include:

Introductory/Balance Transfer Interest Rate: Between 0% and 10%
Introductory/Balance Transfer Period: Between 1 and 12 months
Purchases Interest rate – between 8% and 29% ***
Cash Advance Interest rate – between 8% and 29% ***
Interest Free period – between 0 and 62 days
Annual Fee: Between $0 and $249
Rewards Programs: Yes or No – but each different program has its own rules

*** Purchase & Cash Advance interest rates on the same card are not always equal. In fact cash advance rates can be up to 8% more than purchase rates on the same card.

Credit cards come with all combinations and permutations of different rates and features from the above list, even cards from the same bank. You need to research the features of each one to find the best one for you. You can get more information at http://www.infochoice.com.au.

How do Credit Cards work for my CCP?

If you are a transactor, then in order: interest free periods, annual fees and rewards programs are probably the most important features. Interest rate is less important as you don’t plan to pay any interest! Beware though that if you miss paying in full by the due date, you will pay interest for the full period. Also cash advances always incur interest from the date of the advance to the date of the repayment.

If you are a revolver then these features are of greater importance: introductory/balance transfer interest rates, introductory/balance transfer periods, regular interest rate and annual fee. Longer interest free periods are of no use to the revolver as you always have a balance. Also ignore the temptation of rewards schemes as the potential rewards become very expensive if you are paying high interest rates.

Help! I don’t want to be a revolver anymore!

Most people do not intend to have a long term debt – but life happens – there are necessities and emergencies, shopping trips and gifts for others, several small indulgences – that together all become one large debt.

So what is the cost in the long term of being a revolver?

If on 31 December 2009, you had a credit card debt of $5,000, an interest rate of 16% and you repaid the minimum repayment each month (3% or $150) AND you made no further purchases:

• After one year (31 Dec 2010), you have paid $1,800 in repayments but only reduced the credit card balance to $3,923.
• The credit card will be finally paid off nearly 4 years later (30 Sep 2013). The total repayments will have been $6,657.

How can you get out of debt quicker? Using the same balance and same interest rate BUT a repayment of $250 per month:

• After one year (31 Dec 2010), you have paid $3000 in repayments but the credit card balance has reduced to $2,631.
• The credit card will be finally paid off in only 2 years (31 Dec 2012). The total repayments will have been $5,855.

If you make other one off repayments such as money from a tax refund, the debt will reduce faster.

You can lower the interest paid and the eventual total repayments by using a balance transfer to another credit card at zero interest rate for an introductory period of 6 or 12 months. This strategy only helps if you become a transactor and pay off any new purchases on your credit card at the end of each month.

Please note that all blog posts written on financial matters should not be taken in any way as advice from Tom On Tuesday. This blog post contains general information and the opinions of Tom On Tuesday. This general information also only pertains to Australia. Anyone reading this blog should seek out professional advice for their personal circumstances before making any decisions.

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