Credit cards 101

Some people’s experience of credit cards is the equivalent of financial imprisonment. This often follows the view of credit cards being the same as free money.

It’s easy to get caught in this trap. After all, you probably experienced a school education where you solved complex mathematical problems and studied classic literature, but no classes were offered in personal financial management.

You probably didn’t learn the practicalities of how interest compounds on a credit card, and how the $20 meal can actually end up costing you $40 or more. It’s also never been easier to take that vacation now and pay later – you don’t need to do the boring work of saving beforehand. And everyone else does it, so it doesn’t occur to you to do things any differently.

If this sounds like you, here are some basic tips to get you better acquainted with the reality of credit cards.

1. Don’t carry a balance on your credit card

A credit card balance is one of the highest interest rate loans you can have. Read the fine print of your contract. You could have something like a 60-day interest-free period, so pay off your whole balance before this time period expires. Better still, budget to make sure you can pay it in full each and every month.

2. If you do have a balance, switch to a credit card that offers an interest-free period

Check which banks have the best offers, then switch and make sure you can pay it off before the interest-free period expires. Also, cut up the old card to avoid running up more debt.

3. Limit the cards you have

Why do you need more than one card, really? It’s asking for trouble by making it harder to track your budgeting. Limit yourself to one card, and don’t increase the limit to more than you can comfortably afford to repay.

4. Always pay more than the minimum

If you can’t afford to pay out the whole balance, at least pay more than the minimum. A balance of $1,000 at an interest rate of 18.5% will take over eight years and a total of $1,924 to repay.

5. Rewards cards aren’t necessarily so

There are plenty of frequent flyer and other rewards cards that look like they give you free money. But, really, the interest rate is probably higher and you may have to spend your annual salary on it to see any benefit.

6. Watch the fees

Many credit cards charge annual fees for simply the privilege of having their card in your purse, but you could also be paying fees for late payments, or when you can’t meet the minimum payment. Shop around for a better deal.

7. Stay away from store cards

They can be so tempting because you have more to spend in your favourite store, but this extra source of credit could add up to more than you can comfortably handle.

8. If you can’t trust yourself, get a debit card instead

If you find it all too tempting knowing you have free money in your purse, get rid of the temptation altogether and use only the money you have saved. When you run out, you stop buying. You won’t get into massive debt so easily this way.

A credit card can contribute to your financial freedom rather than financial imprisonment if used the right way. Learn how to make it work for you, otherwise get rid of it before you end up in a financial sinkhole.

Five ways to enjoy a night out without going broke

Your friends can have a direct influence on how you spend your money. It can be hard to have a big night out without spending up big on drinks, dinner, movie or cab fares. Especially if this has already become a habit.

But there are ways to enjoy being with friends, have a good night and still have some money left over.

You don’t need to give up your social life to be frugal. Here are five simple ideas to start you thinking.

1. Suggest something different

You don’t always need to spend a lot of money when catching up with friends. Decide on a budget together for your night out, then only take this amount with you – and no credit cards. Or try suggesting a different activity where you can be with your friends and spend less than you normally would. Do some research and find a free event around town.

2. Be the host

Rather than going out to a club or bar and spending a small fortune on your tipple of choice, invite you friends over to your house and try a pot luck dinner. Everyone can bring a dish — or even a bottle of wine for a cheese and wine tasting party. You’ll be able to hear each other speak over your favourite tunes and nobody needs to know that you are trying to save money.

3. Take up a new hobby

There are plenty of hobbies where you can spend time with existing friends – or make new friends – and not spend a bundle. You could even pick up a new skill or develop a latent talent. You could join a sporting club, do an art class or a cooking class, or even learn how to restore old furniture to sell online. Discover something new to take pleasure in and you could get a new sense of wellbeing.

4. Have a movie night at home

Invite your friends, make your own popcorn then dim the lights to watch that new release movie from your local video store that you’ve been hanging out to watch. You can lie on your comfy sofa and you get to decide when to have intermission.

5. Add new friends to the mix

If your attempts to spend less while in the company of your friends fail, you don’t need to give up your friends. Just spend a little less time with them and add some new ones to the mix – preferably ones who share your financial values. You’ll see that it is possible to have a good night out without going broke.

How to escape a shopping addiction

You think it’s just an impulse purchase – the handbag on sale, the shoes that have been discontinued, or the on-trend colourful toaster that you know will brighten your mornings.

But routine impulsive buying is a weakness for many – in fact it’s been estimated to affect about 15 per cent of us, and it cuts across all education and income levels.

The problem comes when the threshold is crossed from buying only occasionally to buying compulsively, and you become unable to control the urge to buy things despite the overwhelming burden of debt. It becomes an itch you have to scratch, and you make purchases that you ignore or regret afterwards.

It’s interesting to understand that shopping has little or nothing to do with the specific objects purchased. Many go on shopping binges when their feelings are hurt. For others, its a desperate need for approval. Most of what these shoppers buy isn’t even for themselves.

A hallmark of compulsive shoppers is the repeated purchase of things that aren’t used or are hidden away.

It’s possible that the pattern of compulsive spending began in childhood by spending whatever money you got immediately, or with parents who bought you whatever you wanted. You may have never learned to get as much pleasure out of saving than spending. And so it became a habit that is just too hard to break.

For others, the trip to the shopping centre has become a ritual assurance of love and self-worth, offering an escape from loneliness, despair and anxiety. It’s not the products bought that matters, but the process of buying.

Whatever the cause, it’s no surprise that the emotions driving people to compulsive spending have much in common with those seen in people with other addictive habits – one of the most marked being feelings of low self-worth. Like other addictions, shopping fills a void and bolsters sagging self-confidence.

But it’s hard to get serious about compulsive shopping because, unlike other addictions, shopping is condoned by society. All we need to do is turn on the TV to be bombarded with new things to buy and sales we must not miss.

But, like all addictions, there are consequences to compulsive spending. Some of the more obvious consequences include massive credit card debt, spoiled relationships, work problems, and depression and anxiety.

There are also less obvious consequences, making it harder to acknowledge and take steps to alleviate the problem. It could be that you are unable to save for a deposit on a house, pay off a debt or fund your retirement adequately.

Whatever the cause, the key question to ask yourself is whether you continue spending for the wrong reasons. If this could be you, the following tips can help:

1. Admit your spending habits

The most extreme compulsive spenders tend to hide or lie about their purchases, buy items that still have price tags attached, and max out more than one credit card. Be honest about your spending habits.

2. Get to know yourself

Ask yourself, really, why do you keep buying things you don’t need. Is it the thrill of the hunt? Pleasure in finding a great sale? Beliefs you’ve grown up with such as money is only good after its been spent? Examine why you spend.

3. Take control

Cut up your credit cards if you don’t think you can control your spending with them. Use only cash or a debit card. Refuse to take on any more loans, or draw down your mortgage.

4. Set up a budget

If you find it hard to get motivated to budget, or would like to start but feel so stuck, find out what you can do about it, and start small. Even start by writing things down and keeping a daily log of what you spend along with the feelings associated with the purchase.

5. Write down your financial goals

If you have something to aim for it can help motivate you to think of your finances differently. For example, saving for a reliable car, a trip to Europe next summer or a deposit on a house can give you the motivation you need to stick to a new plan.

6. Steer clear of temptations

Plan all shopping trips and stay within a budget. Avoid the discount warehouses and shopping mall. If you identify a “want” rather than a “need”, leave it for a day or two, then only go back and buy it if you still decide you really need it.

7. Find healthy alternatives

When you start to feel the urge to go spending, go for a walk or read a book instead. You could even consider volunteering. Finding something else to do could take your mind off the urge until it passes.

8. Know when to get help

If you feel your spending is out of control and that you can’t wrestle with the problem alone, seek out counseling or therapy, or even a debtors anonymous group. There is help out there if you look for it, so there is no need to suffer in silence or continue the pain of compulsive spending.

Five tips to reduce your credit card debt now

What starts out as a convenience, as extra money just when you need it most or an easier way to buy more stuff can quickly become a burden.

Your credit card is not doing you any favours if you struggle to pay the minimum amount each month and think that hitting the credit limit is just plain inconvenient when you need to buy that special gift for your partner’s birthday. After all, it was on sale.

If this scenario describes you, you’re not alone. Collectively over the past 10 years, Australians have tripled their credit card burden. On average, according to the Reserve Bank of Australia, this is $4,700 for every card holder.

This likely means that you have a credit card debt that is unnecessarily eating away at your savings and contributing to your financial woes. So here are five top tips to get your credit card bill under control.

1. Pay more than the minimum payment

For this average amount of debt at a typical interest rate of 15 to 20 per cent, you’d be paying about $800 in interest every year (assuming an interest rate of 18.5 per cent and 2 per cent minimum repayment, calculated using the MoneySmart credit card calculator).

Continue on this path and you’d pay over $14,600 in interest over 49 years to clear this debt. But pay off $250 every month and this debt would be cleared in two years and you’d save $13,700 in interest.

Imagine how much worse it is with larger credit card balances. Always try to pay more than the minimum payment if you are serious about getting rid of debt.

2. Stop adding more debt

Think of your debt as a small hill of dirt in your back yard. To get rid of that dirt hill, you need to dig out a shovel at a time. Now imagine for every three shovels of dirt that you dig out, you toss four shovels back on. How long will it take to get rid of that little hill? Piling on more debt while you are trying to get out of it doesn’t make much sense.

Will you really miss that pretty new top in your wardrobe if it’s not there? Or the latest Dior sunglasses that match your new handbag? Chances are that you already have enough stuff, so stop adding to it!

3. Use balance transfers

Call up your credit card company and ask if they can lower your interest rate or offer you special interest on balance transfers. Repeat with all the credit cards you have, and consolidate your loans onto the cards that offer the best interest rate.

But watch out for any balance transfer fees and make sure you are really coming out ahead. Then read step 2 again.

4. Get rid of your credit cards

One of the biggest downfalls that most of us have is the reliance on credit cards. Unlike spending real cash, when you charge it to a card you don’t feel the burn. So if you cannot control how much you spend on your card then cut it up, lock it away, freeze it in a block of ice or bury it in your garden until you are out of debt.

5. Change your spending habits

You pride yourself in being the spontaneous type, and this can be a good thing when it comes to trying out a new vindaloo recipe. But it’s also your downfall when you go shopping. Have you ever bought a pair of jeans that looked hot on you under dim lighting but you’ve had to relegate then to the bottom of your jeans pile because they are not so flattering in the bright light of day – never to see daylight again?

Do you always plan before you buy something or do you just pick things up? Ask yourself if you really need it before you buy it. Better still, walk away and go back for another look in a few days time if it’s still playing on your mind. The chances are you’ll have forgotten about it by then. Take a long hard look at your spending habits and fix any shortcomings.

Start a financial diet

Going on a financial diet is like going on a food diet. It’s not easy and there are always temptations. But if you are enslaved by your financial miseries, it’s time to make some sacrifices before the molehill becomes a mountain of debt that forces you onto financial life support.

Help, I can’t get motivated to budget

You’re not alone. That quick Thai take-away dinner on your way home from a late night at work last week and the new shoes on sale that you just had to have are now staring back you on your statement and looking much less attractive than they did at the time you handed over your card.

If some variation of this is a regular occurrence for you then the chances are high that you don’t have a budget. Or that you have trouble sticking to it. The simple economics is that you derive more satisfaction from your impulsive purchase at the time than you do in seeing your bank balance grow. The truth for you and many others just like you is: have money, will spend.

The unfortunate reality is that most of us have been conditioned that way. It’s only a pair of shoes and they made your legs look so much slimmer – and of course you deserved them. After all, you haven’t even bought any new shoes in well over a month. Meanwhile, you had a busy day at the office and were hungry, and that Pad Thai hit the spot perfectly.

In a parallel universe, you could have admired the shoes in the shop window, kept that credit card firmly stowed in your wallet and continued on walking until you got home. You would then look in your full fridge after your weekend supermarket expedition and chop up your veggies to toss in with some chicken, noodles and that new brand of Pad Thai sauce with the face of some MasterChef contestant from a few years ago.

Then you could have enjoyed your dinner while standing in the kitchen in one of your existing three pairs of hot red heels before packing the leftovers in a take-away container for lunch tomorrow. Guaranteed saving of at least $150.

So you may have lived through that first scenario this time around. Still, there’s no point in beating yourself up over it with those red heels. You tell yourself you’ll do better next time to alleviate your guilt today, but really, will you do better when you are confronted by the next “must have” accessory in your favourite colour?

What can you do today to build a new neural pathway that makes you walk right on by a store that is screaming out your name to buy something? The temptation may always be there, so how do you learn to not heed its call?

Start by paying attention. Begin by recognising the feeling of not being good enough without that new outfit or toy – even though you felt more than adequate those few minutes before you heard that unmistakable “buy me” voice imploring you to take it home.

Then allow that feeling to motivate you into taking back control and, dare I say it, set up a realistic budget.

What does a realistic budget look like? That’s a whole topic in itself. The first hurdle is getting you motivated enough to find out.