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 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.

I’ve decided to budget but feel so stuck

Okay, so you’ve fretted over your finances for long enough, and you can’t bear the thought of being in the same situation with your finances this time next year.

Or, heaven forbid, an even worse position – even though if you are completely honest with yourself you see that this is a very likely scenario.

So you take the bold step of adding a tentative three-hour appointment with yourself in your handy iPhone calendar on an evening when you can’t afford to join your mates at the local pub, and are suddenly filled with trepidation as you hit the save button over how this may change your life.

Will you go from shouting your friends a beer on Friday night to sitting at home alone watching Better Homes and Gardens and taking notes on how to make a better souffle? Can you ever again have your favourite gourmet wood-fired pizza followed by raspberry gelato after seeing the latest thriller starring Bruce Willis at the movies? Hell, will this mean that the only movies you’ll even see in future will be the ones on free-to-air TV on all those Saturday nights when you’ll be as free as a bird with a ball and chain tied to its left leg?

But you take a deep breath as you hit the save button on your appointment and start to count down the days to your own Armageddon.

The day finally arrives when you decide to tackle your demons. And, just as you imagine a demon would, a heavy weariness descends over you in a dark cloud. It would be so much easier to accept that last-minute invitation to see the band only in town for this one weekend and be done with it.

But you choose to stay and face the music at home, alone. With the Birds of Tokyo belting out their latest hit in the background, of course. And you pat yourself on the back for getting off to a great start as you unscrew the bottle of cleanskin Semillon from New Zealand that you bought on special yesterday in anticipation of budget cutbacks.

You take a seat as you admire the latest super-fast laptop with a terabyte of storage in front of you – your last major purchase, you told yourself – and feel that demon clench you around your gut and threaten to annihilate you if you don’t stop this ridiculous attempt to take control of your money. After all, nobody else does it, right?

You hit back by pressing that teeny button to turn on your computer. As it boots up, it teases you by sounding like it’s about to take off to Hawaii in first class to sip Margaritas on a sandy white beach.

Then it hits you like a demon with an oversized baton. You don’t know where to start. As you stare at the blank screen you don’t even know which programs to open, which bills to look at first – or even where to find some of them.

You think of hitting back again by slamming the computer shut and simultaneously giving that demon a sucker punch without realising that, in fact, the demon would be the one coming out on top. You could then grab your wallet, keys and new iPhone in record speed, toss off those shackles and fly out the door.

If this is where you find yourself, stay put. Think of it like training for a five-kilometre run. You don’t put on your tattered old sneakers and expect it to be a walk in the park in record time. You need the right gear and a good understanding of your starting position. Do you have a dodgy ankle you need to watch or an existing heart condition you need to manage?

Then, even though you put in consistent effort over time you see only marginal results with each training session. Until one day you look back and realise that you have completed the course without feeling like you need to lie down for the next hour.

Running can make you healthier, just like budgeting can make you wealthier. Here’s three things you can do now to start your budgeting off in a new wealthier direction.

1. Take stock

Stop and collect your thoughts. In fact, while you’re at it, collect all your bank and credit card statements, bills, information on other outstanding debts, and even your investments and superannuation statements.

You need to know what your financial position is now before you can really do anything positive about it. This becomes the stake in the ground from which to measure your progress. Try to avoid beating yourself up over past mistakes that got you to where to you are now.

Each of these items needs to be dissected to give you a clearer view of where you are at.

2. Select your arsenal

You wouldn’t go jogging in your Prada’s, and you can’t budget properly on the back of an envelope. Just like any job worth doing, you need the right tools.

What are some of the tools at your disposal?

• Pen, notebook and calculator: Trusty old school methods can be just as effective today.
• Spreadsheet software: You may already have Microsoft Excel or iWork Numbers as part of your computer set-up, but there are also free online spreadsheets you can use.
• A budgeting app from the iTunes store: There are now many to choose from, and you can read the reviews from existing users to see which is right for you.

Take your time and investigate your options. Then, if using a tool that is new to you, take the time to learn how to use it. After all, you wouldn’t charge into battle brandishing a gun you not know how to fire it.

3. Diarise a regular date with yourself

To keep a healthy and happy relationship going, we are advised to schedule regular date nights with our partner. To keep your finances healthy, you similarly need to book in a regular catch up.

Do this now before your calendar gets filled with other really important dates. Make a recurring calendar entry – whether weekly, fortnightly or monthly and treat it like boot camp. You may not look forward to it and may not even really enjoy it while you are there, but you are always glad you did it afterwards.

Now, my friends, the real work of budgeting can begin.

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.