Credit cards can be a useful tool for managing your family finances, but they are also one of the most misused financial products on the market. Credit card mistakes can be a costly exercise.
According to Money Smart’s credit card debt clock, Australian’s owe around $35 billion in credit card debt which equates to around $4,700 per card holder. With interest rates that average between 15 – 20%, the average card holder is paying around $850 per year in interest.
Misunderstanding the interest free period
There is often a lot of confusion around how the interest free period works credit cards. A better understanding of this alone can mean money saved off your annual interest bill.
Most people assume that this period starts from the date of the purchase. This is not correct. The interest free period starts from the beginning of your statement period (you can find the statement period at the top of your most recent credit card statement).
A statement period is usually 30 days – so if you have a 55 day interest free period on your card, you will have an extra 25 days from the end of your statement period to pay the full balance before interest is charged (that is a total of 55 days).
So you do not have a flat 55 days interest free on all purchases, the interest free period will in fact be more or less on a particular purchase depending on when in the month you buy.
Common credit card mistakes
Here is a list of 4 mistakes that can add to your credit card interest bill:
- Not paying off the balance each month
The interest free period only applies where you pay your balance off in full at the end of the statement period. If you are only paying the minimum repayment, you will begin to accrue interest on the outstanding balance AND you will not have an interest free period on any purchases into your next statement cycle.
- Making late payments
If you make a late payment, you will accrue interest on the balance outstanding from the end of your statement cycle up until you make the payment and you may also be charged a late payment fee.
- Making cash advances
When you withdraw money from your credit card at an ATM you are making a cash advance. These types of withdrawals are not subject to the interest free period on your card and you will pay interest from the date of withdrawal until the amount is paid off.
- Not checking your credit card statement
It is important to check your credit card statement regularly (each month when the statement is mailed to you is good opportunity) to ensure there are no erroneous charges. So often this happens and so often it goes unnoticed. Things like double charges, payments taken in error and fraud can mean you are carry debt on which you may be paying interest that should never have been there in the first place.
Quick tips for beating credit card debt
It doesn’t matter what size debt you are carrying on your card at present there are some quick ways to take back control and start on paying down the debt:
- Stop making cash advances!
- Stop using your credit card for everyday purchases (leave it at home in the draw)
- Pay more than the minimum repayment (aim for double)
- You should not be putting money into a savings account whilst you are accruing interest on credit card debt, if you have spare cash each month, pay it off your card/s
- If you have more than one card, consider a balance transfer with an interest free period (focus on paying off everything you can within the interest free period)
- Set up a direct debit to pay a regular amount off your balance (schedule for the day after pay day)
By focusing on actually repaying the debt (even in just small amounts) and not just servicing the interest, you are on your way to eliminating your credit card debt for good.
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