7 common credit card traps to watch out for

14 Dec 09 / Posted by: Jessica

If you’re disciplined and pay off your credit card in full each month, it can be a really useful tool – providing a backstop for emergencies or unexpected bills and essentially giving you interest-free shopping until payment falls due.

The problem is that most of us don’t use our Amex or Visa in that way at all –Kiwis collectively owe around $2.4 billion on our credit cards – and that figure just keeps growing as interest accrues every time we buy something else or only pay the minimum monthly amount due.

So what’s the value of knowing the credit card traps to avoid? Priceless. Start by watching out for these common offenders below:

Trap #1: Focusing on the wrong rewards

If you’re like most people and pay back less than the full amount owed each month, your best bet is to ignore cards with rewards schemes, as these tend to have the highest interest rates and annual fees. Instead, look for a card with zero annual fees and the lowest interest rate possible.

Trap #2: Choosing a limit based on what you spend

Sure it’s flattering when the bank invites you to increase the size of your credit card limit but avoid the temptation and decline. They want you to owe more, because that’s how they make money – there’s no upside for you. Base your limit on how much you can afford to pay back, not on how much you – or they – think you can afford to spend.

Trap #3: Not shopping around

The amount of interest you’ll pay on a credit card varies hugely – so it’s worth shopping around. www.consumer.org.nz provides up-to-date information on interest rates.

Trap #4: Only paying the minimum each month

Set up a direct debit from your savings account for the day of the month when your credit card falls due and pay it off in full. If that’s not possible, do the next best thing and pay as much as you can – preferably more than the monthly minimum due. That way, you’ll reduce the total amount of interest you’ll pay more quickly.

Trap #5: Withdrawing cash

Money withdrawn from credit card accounts usually attracts interest from the moment you press “OK”. If you’re traveling overseas and intend to use your credit card as a source of cash, make sure you put it in credit before you go away. Better still, swap your credit card for one of the new debit cards so you don’t find yourself undoing all the benefits of your holiday as you slave to pay back the debt you’ve run up while you’re away.

Trap #6: Using it as your own personal loan

If you’re really strapped for cash you may actually be better to extend your mortgage as the interest rate is likely to be a lot lower than on a credit card. Just make sure you treat it as a once off and pay it back quickly. Don’t let it become something you do on a permanent basis or you’ll never get out of that dark debt hole.

Trap #7: Not saving instead

Realize the difference between needs and wants – and save for both wherever possible. Make sure you have enough put aside to cover your basic needs (food, housing, power, phone and water) in the case of an unexpected life event like illness or redundancy (ideally, three – six months’ salary). Then do what our parents did and postpone buying those nice-to-haves until you have enough money saved to buy them, or purchase them on lay-by over time.

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