Are you using your credit card effectively?

By Will Keall

Over the holiday period, most of us might feel a little nervous about the bashing our credit cards receive at this time of year. When used effectively, credit cards can be a great tool for managing your finances; however you may need to exercise caution to avoid unnecessary debt.

Now is as good a time as any to consider reassessing the way you use your credit card and determine whether you could be utilising it more effectively.

Here are some things to consider thinking about:

Do you pay off your card every month?
Although it can be hard sometimes to pay off the total balance each month (especially around periods of high usage such as Christmas!), paying before the interest period kicks in is key to avoiding paying more than you need to.
If this is not possible, most people opt to pay as much as they can to keep the amount of interest they will pay to a minimum. Aim to get back on track for next month’s payment, or the month after before the interest costs really start adding up.

Do you know where your money is going?
Simply working out a budget for your spending can help you resist the pull of the plastic. Each month, you get a bill outlining exactly where your money is going; this is a very helpful tool when it comes to figuring out how effectively you use your credit card. Pulling out your old bills and considering where you can cut costs can be a good method to avoid building debt.

Could you be linking your credit card to your home loan?
Some of you might have a credit card that is directly linked to your home loan. This can save you money on your mortgage’s interest payments, as the money sitting in your home loan account is maximised when you take advantage of the interest free period on your credit card. One thing to note with this arrangement is that clearing your balance each month is vital to making a saving, otherwise you aren’t taking advantage of the interest free period your card offers. Talk to your lender about linking a credit card to your home loan.

Adjust your credit limit to suit your needs
Determine what amount that you want to limit your spending to each month, and set your credit limit accordingly. Don’t be tempted by offers from the bank to increase your credit limit – they aren’t being generous, they’re trying to tempt you to spend more so they can charge more interest! Remember that your credit limit is how much the bank is willing to lend you, not give you. They’ll want it back! Also note that your credit limit impacts on your financial position when you make an application for a home loan or other finance. The higher your limit, the higher your potential debt, and therefore the less they will lend you.

Take note of your account balance, not just your available credit
Many people fall into the trap of taking their ‘available credit’ as their money, when in fact this is simply the amount the bank is willing to allow you to spend over and above what you already owe (i.e. your account balance). This is calculated by subtracting your account balance, as well as any pending transactions, from your credit limit. Remember that this is the amount you need to repay every month if you’re to avoid paying interest.

Don’t always be tempted by points!
Although many credit cards offer programs that reward you for spending with frequent flyer or other points, determine what the value of these points are and whether it is actually worth paying for something on credit card versus out of your transaction account. One frequent flyer point is worth approximately 0.7 of a cent, and most programs provide you with one point per $2.00 - $2.50 spend. Therefore the ‘value’ you are receiving is less than 0.3 of a cent for every dollar spent. It’s also good to consider this if a merchant is charging a fee for paying by card.

Do you have the lowest interest rate possible?
Although you will hopefully be paying off your balance each month before the interest free period ends, considering the rate can be a good idea to prevent getting slammed with extra costs on those few occasions you cannot pay everything off straight away. To secure the lowest interest rate possible on your credit card, consider all options available to you before signing up for one. However, it is a good idea to also consider what other features come with the card, as some cards that offer low rates don’t bring much else to the table. Getting the best value from your credit card does not only depend on a low interest rate! If you are already locked in, never fear, for as long as you are paying off your card before the interest rate free period ends, you won’t be affected by a higher rate.

Managing your credit card effectively not only puts you in a good financial position, it also keeps your credit rating strong because your focus is on repaying the lender as regularly as possible. This will put you in good stead if you wish to apply for more loans in the future.

Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.

Will played a pivotal role in the successful establishment of iMortgage. His dedication and passion for the mortgage industry have won Will the utmost respect as an integral part of the iMortgage brand.

A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”

Will is a cricket and football tragic, who also enjoys running.