Many people have a credit card. They’re convenient, meaning you don’t have to carry around cash, let you borrow money instantly, and also offer benefits such as fraud protection, travel insurance, and rewards programs.
However, credit cards also carry a level of risk and must be used responsibly. Because it’s so easy and tempting to use a credit card for purchases rather than saving money first, many cardholders find they quickly fall into debt. In fact, the average Australian has credit card debt of over $4,000. Credit cards also often carry hidden charges, and interest rates are usually much higher than in other forms of lending.
Another issue with credit cards is that they often use confusing terms and jargons, which the average consumer may not really understand. Not fully understanding these terms, combined with irresponsible card use, will result in poor account management, leading to a bad credit card rating and, ultimately, added difficulty in securing a loan.
It’s therefore important that if you have a credit card, you should educate yourself about what these terms really mean to maximise its use and take advantage of all its perks without any nasty surprises.
Cash Advance Rate
Almost all credit cards have a separate cash advance rate that is higher than the standard interest rate on purchases. This rate will be charged when you use the card to withdraw cash rather than using it to pay for purchases directly.
Payment for gambling-related transactions counts as a cash advance, including the purchase of lotto tickets and scratch cards. It’s also common for card companies to start charging interest on these purchases immediately, as they’re exempt from any interest-free periods.
Other purchases and transactions that come with a cash advance rate include gift cards, purchase of foreign currency, and bills payments.
Many credit cards are advertised with a “0% Purchase” or “0% p.a.” This means that no interest is charged on purchases for a set period, usually 44 to 55 days. This does not mean though that payments made using the card will be interest-free forever. This period can vary between different card companies so it’s important to check the terms and conditions of each individual card you use or call customer support.
Some cards also use the term “0% APR” to describe a promotional offer where no interest will be charged on purchases for a longer time—usually six months or longer. Purchases made during this period will not be charged interest but they will start accruing interest at the end of the offer period. However, this promotional rate will usually be cancelled and the standard rate will apply if payments are late or the cardholder breaks the terms of the credit agreement in any way.
As interest is charged daily, the amount of interest accrued on a credit card balance will depend on the number of days between the bill being issued and the payment being made.
Residual interest is tricky because many cardholders think they have paid the bill off in full when they pay the amount under “balance due.” However, the interest will have usually increased by the time the credit card company receives the payment even if it’s made on the same day the bill is issued, as it normally takes a few days for the payment to settle.
A couple of ways to avoid residual interest is to pay the card balance in full every month or to use a card with a 0% APR introductory rate. Failing to consider the residual interest in your credit card purchases will affect how you manage your payments and could lead to more debt and, therefore, a bad credit rating in the long run.
Minimum Monthly Payment
Credit card bills are normally issued with both a closing balance and “minimum monthly payment.” This is the minimum amount you must pay on your card to avoid any additional charges, but you will still be charged interest on the rest of the balance. It’s tempting to pay only the minimum payment but this will mean repayment takes much longer and you’ll end up shelling out a lot more in interest—Australians are paying a staggering $12.3 million every day in credit card interest alone!
It can also be confusing to work out how minimum payments are calculated (each card uses its own calculation), so many cardholders usually do not know how much they will need to pay from month to month. We advise checking your card’s terms and conditions as well as regularly calling customer service just to be sure.
Payment Due Date
You’ll normally have a couple of weeks to pay a credit card bill after it is issued and this will be clearly indicated by the payment due date. However, many cardholders make the mistake of thinking this is the last day they can make payment. As it normally takes a few days for payments to be processed, if you don’t allow enough time for the payment to clear it may be already late and this can result in fees, affect your credit rating, and cancel any special rates you may be taking advantage of.
Foreign Transaction Fee
It can be very convenient to use your card while overseas instead of traveling with a lot of cash, but there are certain pitfalls to be aware of.
Most cards will charge a fee, usually around 2-3% when you make a transaction in a foreign country. These fees can really add up over time if you’re using your card several times a day while you’re on holiday. Some cards also charge a currency conversion fee on top of the transaction fee.
Withdrawing money from an ATM overseas is even more costly as you’ll be charged an additional overseas withdrawal fee, which could be as much as $5 per transaction.
Don’t Be Caught Off Guard by Your Credit Card
Having a credit card comes with a host of conveniences and perks, especially if you’re able to use it responsibly. However, things can get confusing and, if you’re not careful, you could find yourself with more debt and a worse credit rating than before you got your card, negatively affecting your ability to get a loan. As such, if you need help in managing your credit cards or with other financial decisions, it’s wise to consult with financial experts.
At Clever Finance Solutions, we’ll be your experienced partners that will guide you through the confusing bits and pieces so you can focus more on making the right financial decisions. From boosting your credit rating to improving your investment portfolio, we’ll go the extra mile in finding the right solution to help you achieve your financial goals.