Credit cards can be a necessity and are a handy backstop in emergency situations. Many people find that once they start using a credit card, it is hard to stop using them, they are convenient, and you can collect reward points for trips and merchandise. If not used carefully they can quickly become a liability. They are very tempting to use if your bank account is running low, or you see an absolute bargain that you buy on impulse.
1. Don’t Take Your Card When You Go Shopping.
Use a debit card. Leave your credit card at home unless you will absolutely need it. Avoid the trap of going shopping just because you have money available on your card. If you don’t take your card with you, you won’t be tempted with an impulse purchase. Use your credit card to make purchases that you have planned and pay them in full as soon as your statement arrives.
2. Set Up Regular Direct Debits to Prepay at Least the Minimum Payment.
Set up a payment to your credit card that pays at least your minimum payment each month, that way you will never be in arrears.
This will help you to avoid having arrears marked on your credit file because you have forgotten to pay the minimum payment.
With positive credit reporting now in force this is extremely important. Check your credit file at www.freecreditreport.com.au
- A client that has large credit card debt came to see me and asked why his credit score was so low.
- We looked at his credit file and saw that he constantly appeared to be 1 month behind on 4 different credit cards.
- I asked him about this, and he told that he pays large lump sums into his account on a regular basis when he gets paid.
- One card has $60,000.00 limit and he had paid $35,000.00 into the account. This was paid before the statement was issued and as the card hadn’t been paid in full there was still a minimum payment due.
- This wasn’t paid and this was recorded as being 1 month in arrears.
- We advised the client to pay his payments after the statement has issued and he is no longer showing as being behind
3. Limit the Use of Your Card. Have a Small Credit Limit.
Limit your use of your credit card so that it doesn’t become your go-to for spending. Request a low credit limit, if your limit is higher than you’re comfortable with, pay it down and ask the credit card company to reduce the limit. Credit card/banks are longer allowed to raise your credit card limit without your consent, they may try hard to talk you out of having a lower limit.
This is your credit health that you are trying to improve or protect so tell them what you want. High credit limits often tempt you to spend more and they may stop you being approved for a mortgage or other loan as the payments are worked out on 3.8% of your credit limit even if the card has been paid in full. So, if your credit limit is $20,000.00 the minimum payment that will be counted as part of your affordability or capacity to pay is $760.00. this amount is calculated as a regular monthly payment even if you have paid your card in full.
4. Pay Your Card in Full.
If you are struggling to pay your credit card in full for each month, don’t use until you have paid it off. Avoid having regular payment out of your account as these are often hard to cancel.
5. Double the Minimum Payment
We have all seen the notes on our credit card statements showing that if we only pay the minimum payment it may take 30 years to pay in full. If you make only the minimum payments, you will in debt for years. If you are unable to pay the full balance every month, try to pay at least double the minimum monthly payment. If you combine this with not using your card you will see you’re the balance reducing quickly.
6. Have One Credit Card
Limit yourself to one credit card. This will make it easier to decline offers from other credit card companies.
7. Don’t Use One Credit Card to Pay off Another.
Some people use a credit card to pay for another credit card, this is a dangerous and expensive practice as you are paying two lot of interest. You should get help if you can’t pay your credit card off within a few months or if you find that you need your card to pay for regular living expenses.
8. Ensure Your Rewards are Worth It?
Check what the terms and conditions of your rewards points are and how they are calculated. Sometimes it may have been cheaper to purchase the item with cash, this is especially relevant if you must pay interest on your purchases.
9. A Credit Card is Not the Best Way to Build a Credit Rating.
It is a myth that are credit card is the best way to build your credit rating. If you want to build a strong credit rating, follow these pointers:
- Do not borrow from short term lenders also known as pay day lenders. These are for amounts under $4,000.00 and are usually short-term loans.
- Limit the number of enquiries for loans. Each enquiry will lower your credit score.
- We often meet clients that have decided to make multiple applications online to try and get the lowest interest rate and terms, without realising that they are damaging their credit file and making it harder to get a loan.
- Contact a reputable finance broker like www.loans123.com.au who can check your file with out damaging your credit score.
10. Reward Yourself
Find ways to reward yourself when you pay your card of in full. It is very rewarding to get your card back to a zero balance. If you maintain a regular payment and control your spending, you will be in control of your card instead of the card controlling you.