Credit cards are great – if they’re used wisely. If not, they can be full of traps for the unwary that can seriously damage your financial health.
The good news is that most of the worst mistakes you can make with your credit card have already been made, so you can learn from others’ misfortune. Here are some of the most commonly made credit card mistakes and how to avoid them.
1. Choosing the wrong card
Choosing a card because it has some nice looking rewards attached is a trap too many of us fall into. For most Australians, if you’re spending less than $10,000 a year on your credit card there’s no point in having a rewards credit card, because the annual fees will far outweigh any rewards you’ll earn. And that’s not including any interest paid – if you have a rewards card you could be paying interest above 20 per cent. There’s no way that’s an economically sound decision.
2. Seductive introductory rates
Similarly, don’t be sucked in by a card with a great introductory rate. Make sure you check what the interest rate jumps to after the introductory period is over, and before applying for yet another card, ask yourself if you really need it – having too many cards can count against you when you decide to apply for a larger loan, like a home loan.
3. Transferring your balance… and continuing to spend
Another common mistake people make is taking out a balance transfer card to try to clear their debt faster, but then using the card to make new purchases. Really they’re just increasing the amount of outstanding debt that they have, rather than paying it off.
4. Only paying the minimum balance
You’ve heard it before but we’ll say it again: only paying the minimum balance gets you nowhere. Try not to view your card as an additional source of cash flow. If you can’t pay off the amount you’re charging to the card, in full, each month, you should think twice before spending the money in the first place.
5. Making late payments
There’s no excuse for being late with your payments, and the late fee you incur is just money wasted. Credit card interest is Australia’s biggest waste of money – at over $6 billion a year! If you’re the forgetful type, set a reminder on your phone or arrange a regular direct debit, and make sure you find out what the policies are about late fees around public holidays and weekends.
6. Exposing yourself to fraud
Always check your statements. Checking that you actually made each listed transaction means you’ll catch any fraudulent activity in time to query it.
7. Not knowing the terms and conditions
Yes, you need a magnifying glass to read it, but the fine print is where you’ll get answers about balance transfer fees, when your zero interest period ends, introductory rates, overseas transaction fees and any other clauses you need to be aware of.
Lastly, never get complacent about your card. A lot of people don’t even think about switching their credit card, but many credit cards these days are starting to offer some pretty good bonuses. They’re getting very competitive with things like purchase protection policies, extended warranties and online purchase protection. If you have a pretty standard credit card you could, for a similar annual fee, get a better card with bigger benefits.
[author image=”http://www.woman.com.au/wp-content/uploads/2013/07/kirsty-lamont-2013.jpg” ]Kirsty Lamont is a director of comparison site Mozo.com.au which helps Australians save on home loans, credit cards, insurance and other financial products. At the age of 25, Kirsty suffered serious first home buyer pain when property prices were moving faster than you could save. After 18 months of searching and having to sell her car and ditch a trip to New York to boost her deposit, Kirsty finally scored her dream apartment and has never looked back. [/author]