Five most common credit card mistakes
06 Nov 2013
Although those little bits of interest seem small, getting the right credit card advice can save you thousands of dollars in the long run. Here are our top five mistakes and how to avoid them.
Closing old accounts
Although this may seem contrary to logic, there are some downsides to closing old credit cards.
Cancelling an old credit card may affect your credit utilisation ratio – how much credit you have versus how much credit you use. The higher your ratio the worse it is for your credit rating.
Also bear in mind that credit card account history can hang around for seven to 10 years, including positive history.
If ultimately closing an old account is going to persuade you from using less credit however, it can be a good idea.
“It simplifies your life,” says Mike Sikar, from Delta Financial Planning in North Sydney. “If you’ve always made the payments on time, closing credit cards wouldn’t be adverse to your credit rating.”
Getting sucked in with store credit cards
Store cards can be tempting; they generally have some sort of enticing offer to draw you in. Often this comes in the form of instant rewards such as 10 per cent off first purchase or a points system.
Be careful of the fine print though. Often when things sound too good to be true they are. These cards generally come with a higher interest rate than most – Myer’s store card currently sits at 23.49 per cent interest per annum. This is quite high considering most credit cards sit at around 12-15 per cent.
“A credit card is a credit card, but all store credit cards would have higher interest rates,” says Mike. “Obviously if you’re diligent with your money and you pay your bills within the 55-day interest-free period then they’re ok. But from experience, the credit cards don’t stop you from over-spending.”
Disclosing credit card number too willingly online
Following random links or using unknown shipping sites can be risky.
Not only that, hackers can design emails to look like your bank in an effort to steal your online banking information.
If in doubt when using your credit card online, stick to using PayPal only – this will offer protection if the unthinkable does happen. PayPal protects against fraud for a certain time period after purchase, and it never discloses your credit card number.
If it is a site you visit frequently, such as eBay or Internet banking, check that the URL and the website have nothing out of the ordinary.
Using credit cards just to get rewards
Again, a credit card is a credit card. Just because you are using it for the points doesn’t mean you are getting any more value. It also means you might buy things you wouldn’t have bought had you used cash. Not only that, can you guarantee the points will still be valuable in five years?
“I would probably say 80 per cent of people I meet tell me that story; the reason that they have their credit card is for the rewards,” Mike says.
Ignoring credit problems
Last but not least ignoring credit problems is another offender. And no, unlike your average high school bully, if you ignore them they will not go away. They can quickly spin out of your control.
If you have a credit problem it’s best to act or seek advice early; even paying that little bit extra off per week can make a huge difference. Often it can be a cash flow issue.
“Most people are not diligent with their cash flow. If you’re a self-funded retiree and you’ve got $50,000 a year to live off which is about $1000 a week, I think life is a lot simpler when you just take out $1000 cash a week and live off it,” says Mike.
Always know what’s coming in and going out so you know exactly what is happening with your money.
Final words
If you’re a retiree who’s struggling to pay your credit card off before the interest-free period is over, chances are you’re overspending. It may be time to revisit your budget and get some advice.
“My advice would be that if you’re going to have a credit card, have one credit card. Understand what the annual fee is and look at all the auxiliary benefits,” says Mike. If you’re an over-spender, leave the credit card at home.
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