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.

Find lost money, the legal way

Have you stashed away some money and then forgotten about it? It’s possible that you could be sitting on a small fortune and not even know it.

There could even be money owed to you from unpaid wages or lost superannuation that you don’t know about. It’s like winning the lottery without buying a ticket.

There’s a whopping $677 million sitting in lost accounts, and more than 1 million people could be sitting on a small windfall.

You could get lucky and have unclaimed money if you:

• haven’t made a transaction on your cheque or savings account for over three years
• stopped making payments on a life insurance policy
• moved without leaving a forwarding address
• have noticed that regular dividend or interest cheques have stopped coming, or
• were the executor of a deceased estate.

Fortunately, the Australian Securities & Investments Commission has made it as easy as possible to look for lost money. Simply visit ASIC’s MoneySmart website at moneysmart.gov.au and start searching.

ASIC can access unclaimed money from bank, credit union or building society accounts, shares and life insurance policies. They say that one of the more common reasons why people lose money is because they change address. In 2011, Australians recovered $56 million using this service.

The rule is that if you don’t claim what is yours, then the government gets to keep it. All the more reason to get searching.

In the past, if you happened to have an inactive bank account or life insurance policy it would be transferred to ASIC after seven years. According to the government, the downfall of this was that your money could be eroded by fees and inflation. This timeframe was recently reduced to three years to ensure that lost bank accounts are better protected from erosion.

Also, from 1 July 2013, interest will be paid on unclaimed money held by ASIC at the rate of CPI inflation, and this interest will be tax-free.

The downfall is that you need to be active with your accounts at least every three years to avoid having them moved to ASIC – where they could earn less than you had planned. You can no longer set your investments and forget about them for a while, then expect to access your money easily on a rainy day.

It’s free to search at www.moneysmart.gov.au/tools-and-resources/find-unclaimed-money. You could even find lost superannuation, lost share dividends or unpaid wages on MoneySmart.

Didn’t get lucky?

The worst that could happen is that you don’t find any lost money. And that isn’t too bad for a few minutes of looking around.

Other ways to find money include:

• Do a budget you may find some spare money
• Reduce your credit card debt and stop paying extra interest charges
• Switch your mortgage to a lower rate
• Save in a high-interest savings account
• Check if you are entitled to any government benefits.

Avoid the trap of turning your home loan into an investment loan

Question:

We have paid off most of our home loan and we want to upgrade to a new home but keep this one as an investment property.

Can we withdraw the equity in our current home and use it as a large deposit in our new home, with the added benefit of increasing the tax deductibility of the investment loan?

Answer:

No, the tax man doesn’t see it this way. You need a little foresight – well, a lot actually – to make this strategy work.

If you were to redraw some funds from your original home loan, it would be considered a new loan when it comes to tax. It’s the purpose of the redraw that determines whether the interest on that portion would be tax deductible.

In your case, using the funds as equity in a new owner-occupied home is not considered to be for investment purposes, and you could be in trouble with your taxes if you attempt this strategy.

But there is a way you can do this without being any worse off. You can get the advantages of paying down your original home loan and not get caught in this trap by having an offset account.

You could set up your home loan with a linked offset account and, over the years, rather than paying down your home loan with accelerated repayments you could instead build up savings in your offset account. Your interest bill would be the same.

The money in your offset account can provide you with a substantial deposit for your new home when you are ready to upgrade, and it allows you to maximise your interest deductibility.

You would simply withdraw the money from the offset account as all or part of your deposit on your new property and the interest on the full amount of your existing loan would be tax deductible.

Financially this could leave you in a much better position – but remember that you must act to set this up before you start paying down your original home loan.

And of course, speak to your accountant about your personal circumstances before making any decisions.

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.