Teaching your card who’s boss
If your credit card had a workout over Christmas, you’re not alone.
Reserve Bank data shows that New Zealanders now have $7.1 billion in balances on their credit cards, up from $6.6b in November 2015.
Here are some tips to get your card working for you this year.
What’s your limit?
Banks and other credit card providers are often keen to push higher limits on their customers.
With a click of your internet banking, you can add a few extra thousand to the money you have available to spend.
But apart from the temptation factor, having a bigger balance than you need can be a drawback.
If you’re applying for a loan, banks consider your credit card limit – not your balance – as your liability. A credit card limit of $10,000 results in a reduction of borrowing power of $47,000 for a couple earning $130,000 a year – almost twice the $28,000 impact that a $5000 balance has.
Keep your limit at a level that you can pay back each month.
Tim Barnett, chief executive of the National Building Financial Capability Trust, says: ‘‘Set your credit limit as low as is manageable if you’re tempted to overspend – or get rid of it entirely. If you can’t pay off the balance in full every month you are lining the bank’s pockets and emptying yours.’’
Interest-free periods
One of the big benefits of having a credit card is the interest-free period it offers – often 55 days.
The thing to remember, though, is that you have to pay your bill in full each month to access this interest-free period.
As soon as you’re carrying a balance, all of your purchases come with an extra cost.
Avoid withdrawing cash from your credit card or transferring credit from your card to your transaction account – interest is charged as soon as you do so, regardless of whether you pay your bill in full each month. There is also a higher interest rate.
Never pay the minimum You’ll be told each month what minimum amount you must pay on your bill. Depending on your provider, this ranges from 2 per cent of the balance to 5 per cent. There is also a minimum dollar value, from $5 to $25.
Tom Hartmann, personal finance editor at Sorted, said people should avoid paying the minimum, if at all possible.
‘‘If you’re only making the minimum payment, it structures it in the lender’s favour. As soon as you pay more, it starts to structure it in your favour.’’
If your credit card balance is $2000, you have an interest rate of 18 per cent and you pay $50 a month, it will take 62 months to clear the balance and you’ll pay interest of $1077.
But if you increase your payment to $100 a month you’ll clear it in two years and only pay interest of $396.
Balance transfers
Many providers offer good interest rates to people who transfer a credit card balance.
Westpac estimates that if you were to move a balance of $5000 on an 18 per cent card to its card with an offer of 5.95 per cent for the life of the balance, you’d save $567.
BNZ offers zero interest for 12 months on transferred balances.
Financial adviser Tim Fairbrother said that made sense for people whose cards were out of control. ‘‘Don’t feel loyal to your provider.’’
But it is important to tackle the debt. Hartmann said it was common for people to transfer a balance, and then rack up another debt on their original card. This does nothing to improve your overall situation.
Rewards rates?
Competition has created more opportunities for consumers as credit card providers try to outdo each other’s rewards programmes
or
low
interest
and interest rates.
If you carry a balance, you are almost always better to seek out a lower interest rate than a glitzy rewards programme, because the rewards won’t be worth enough to justify the extra interest charged. The Co-Operative Bank says its 12.95 per cent Fair Rate card is the lowest bank rate, excluding balance transfers.
It also funnels payments first to the debt with the highest interest rate, which helps if you’re prone to not paying your card off in full.
Rewards programmes often come with higher annual fees, too.
But if you’re a heavy credit card user and clear your balance each month, you may find a rewards programme is worthwhile.