Credit For Playing Your Cards Right
Sun Herald
Sunday July 9, 2006
THEY have found me. Somehow, after only a year of living in my apartment, at least one offer a week for a shiny new credit card now lands in my letterbox.
If I didn't know it would ruin my credit rating, I would be tempted to sign up for every one just to see how far beyond my means banks would be prepared to let me go.Presumably it would be a long way. In just 10 years, Reserve Bank statistics show that the amount of credit on issue has increased five fold from $20.6 billion to almost $100 billion (including charge cards and business credit).Thankfully, however, Australians appear to be too smart to use it. Outstanding credit balances totalled $35.4 billion at the end of April - only 37 per cent of what's available.Of course, that means we are still paying - and banks are still earning - a fair whack of interest. In fact, we are likely to fork out $3.6 billion this year alone (assuming an interest rate of 14 per cent on the $25.4 billion that is accruing interest). That's $180 for every man, woman and child.The banks certainly won't help you reduce this, though. Often, they set the required monthly repayment so low that you will never repay your debt.Let's assume you routinely carry over a debt of $2000, at an interest rate of 17.65 per cent, on a card with a minimum monthly repayment of 1.5 per cent (so $30) and a $59 annual fee that you roll into your balance. These are reasonably common variables.Twenty-five years later, you will owe not $2000 but $3242, says Cannex. And you will have paid $11,970 in interest to that point.This is due to the combination of a high interest rate, moderate annual fee and low minimum monthly repayment.In fact, Cannex calculates that you will still have debt in 25 years if your card has an interest rate of 16 per cent or more (a bit higher than average), an annual fee of $24 (relatively low) and a minimum repayment of 2 per cent or less (about normal).Unless, of course, you pay more than the minimum - or even better, get a card with a lower rate and no (or a low) annual fee. After all, you don't want to be still paying off a jacket bought today in 2031.But the best way to clear your debt is to take out one of the dozen or so cards offering an interest rate of zero per cent for a period of time on transferred balances. This is like a "get out of jail free" card because every dollar you pay comes off your balance. Just be sure to cut up your old card and stick the new one in a drawer so you won't use it; new purchases usually attract a punitive interest rate, from day one, until you clear your transferred balance. (You knew there'd be a catch.) Also, beware of switching cards too many times - under Australia's credit reporting system, the number of credit applications you make is recorded (not your balances or credit card closures) and could give the impression you have a problem dealing with debt. So limit yourself to a couple of applications.Use these cards wisely and you could beat the banks in no time.If you would like to receive free financial advice through the pages of AFR Investor, send an email with your name and a brief explanation of your finances to investor@fairfax.com.au.
© 2006 Sun Herald
