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How to avoid getting lost in debt!

According to Christopher Vogt in his book 'Create Wealth with Quicken', the safest thing to do with any credit card is to cook it! Credit cards are easy to obtain, easy to use, and can be a very expensive form of credit. Assuming that you are not going to take his advice, here are some tips on reducing some of the dangers of credit cards.

Credit cards can now be divided into two main areas: those that offer interest free periods, and those that don't. Generally, those that do offer interest free days (remembering that very few things in this life are really "free") tend to charge either a higher rate of interest after the interest free days have expired, or charge an annual fee of anywhere between $18 and $85. This makes the wallet full of cards which used to be popular very expensive! There is a third kind, offered by some banks, called a debit card, and although it is not strictly speaking a credit card, we have included it here as it is a safe and economical alternative if it suits your spending style.

To select the card that is best suited to you, you need to evaluate your lifestyle and spending patterns. You will soon see that you now have a real choice of cards, one of the advantages of deregulation. The disadvantage lies in having to make a decision and the complexities of all the options available.

How the various cards work

Debit Cards

The safest form of card is not a credit card at all, but a debit card which is linked to your bank account and therefor uses your own money, or draws on an established overdraft facility with the bank. Some cards, including Westpac's, can act as both a debit and a credit card.

"No Interest Free Days" Cards

With these cards there are normally no annual fees to pay for having the card in the first place, but you don't receive any "free" days between your date of purchase and 'statement' or 'due by' date. Some of these cards don't offer all of the added benefits such as travel insurance, loan establishment discounts or discounts with selected retailers or hotel/travel chains, so if you use your card extensively for these types of purchases, you need to check with your bank.

"Interest Free Days" Cards

Pay by the due date to take advantage of interest free days - if this is what you do every month then congratulations! But with the new annual fees you need to choose the bank that has the lowest fee, longest interest free days or the best range of added benefits to suit your spending patterns. You may get better value from a card with high fees such as ANZ Visa Gold for instance if you travel extensively or need multiple cards on one account for family or business associates. If your purchases are business related you may be able to claim a tax deduction for the fee charged.

What if I don't pay in full each month?

This is where things gets complicated if you have a card offering interest free days. Firstly, if you don't pay in full on time, different cards charge differently. Some charge from date of purchase, and some from the date of the statement itself. That may not seem very important but depending on your spending patterns through the month, a card that charges from the purchase date or the date the charge appeared on the statement can cost you double the interest in the first month compared with a card that charges the same percentage interest rate from the date of the statement itself.

Secondly, remember that with some cards, such as ANZ, NAB and WBC's, you only get interest free days if you have no balance owing from previous months and you pay your outstanding balance in full by the due date. On these, you get no future interest free days until you clear your entire account, whilst with those that charge from the statement date itself normally get free days between making the purchase and the statement date.

Other cards charge for the first month by charging a flat fee of the monthly equivalent of the annual interest rate. This is generally better than being charged from the purchase date because you are getting up to 55 days interest free, but effectively only being charged for 30 or 31 days.

In reality there is little difference between cards which charge from statement date and one that charge an initial months interest and then ongoing interest from the "due date", or next statement date

How do I use my cards to keep costs to a minimum?

Firstly establish your spending and repayment patterns. This is absolutely vital, and one way to do that if you have a personal computer is with a program called Quicken, mentioned earlier and available for around \$69 for Windows. Not only will it help you control your credit cards, but also all your personal finances too.

Generally you'll find that you fit into some broad categories and some of the tips below might help you:

Decide whether you use a card for "borrowing", "transacting" or a combination of both. If you're a borrower, go for a card with a low interest rate. If you're a transactor, and pay each month in full, take the benefit of interest free days and added benefits of insurance etc.

Rule number one - actually four golden rules

Rule number two

If you have the funds available elsewhere, always use your own money! At best you might be getting four or five percent interest on deposit funds, so why pay 11.5 % to 18.5% to use somebody else's. This means using a debit card, a card that can switch between credit and debit, or a card offering interest free days and paying by the due date.

Rule number three

Choose the card(s) that suits your spending and payment patterns.

Here are some tips to keep your costs down

If you only use your card for irregular convenience purchases of petrol, take-aways or the occasional small purchases and don't need the added benefits such as travel insurance, it is probably not worth paying a fee for a card. Stick to a no fee, low interest, no free days card such as Metway's VisaCar


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