Credit card smarts

Do you always max out your credit cards? Money magazine founding editor Pam Walkley shows how to avoid spiralling debt by using your plastic wisely.

Consumers with better than average scores should ask for a better deal.

If you or your kids are finding it harder and harder to balance the family budget, you’re not alone. In Australia, household debt is causing real concern. Despite record low interest rates, our indebtedness has grown as more of us aim to own homes and rely on products such as car loans and credit cards, according to financial product comparison site finder.com.au.

Very sluggish income growth hasn’t helped the situation. Recent figures from the Reserve Bank of Australia show the nation’s household debt-to-income ratio has climbed to its highest ever level at 189 per cent. Collectively, we owe a massive $52.2 billion just on credit cards and $32.5 billion of that is accruing interest. In March alone, more than half a million Australians failed to pay off their credit card balance in full, according to Credit Simple, which has an online tool which will provide free access to your credit score.

We would all be better off if we became credit “deadbeats” – someone who pays their credit card in full and on time every month, preventing banks and credit card companies from charging interest and making a profit from consumer debt, says Credit Simple spokesperson Emily Price.

“Some people like to use credit cards for their everyday spending so they can get the most out of rewards programs and get extra treats,” she says. “And some people simply don’t budget and end up using credit cards to get by.

“A major benefit of paying off your credit card in full each month is that you’ll see your credit score improve and the higher your score, the more attractive you are to banks, telcos and energy providers. Consumers with better than average scores should use them to their full advantage by picking up the phone and asking for a better deal. Being a deadbeat has never looked so good!”

The starting point is to find out what your credit score is, which you can do for free on creditsimple.com.au. The maximum score is 1000. Anything above 500 is better than average, more than 700 is ranked as “great” and above 800 “superb”. Below 500 is less than average and under 299 could indicate you have defaulted on payments or have other black marks on your record.

For those who find it hard to be disciplined with their plastic, it might be wise to change to a debit card.

How to “deadbeat” the system #1 Balance transfers

This is where one bank pays off the outstanding debt on a credit card from a previous bank at a lower or zero interest rate. It can work if you’re disciplined enough to pay off as much as possible while the rate is low and cut up the original card.

#2 Consolidate to save

Put all your debts into one low-interest personal loan to make the payments simpler to manage and minimise interest.

#3 Be smart with your payments

If you have multiple debts, set a repayment plan which pays off those with the highest interest rate first, wiping out your debts one at a time.

#4 Lower your limit

If you reduce your credit card limit and cut down the number of cards you have, it will help prevent overspending.