Credits Promise: Have it All Now - Survival Guide

Unfortunately, if someone's trying to sell you a card they're not necessarily going to point you in the direction of a card that's going to be best for you. So how do you go about choosing a card that will work for you? A good place to start is by trying to differentiate between what will be of genuine benefit to you, and what is being marketed as a benefit to you.

In recent years card issuers have worked hard to create an image for their cards as a must-have lifestyle accessory, so that you see them as a 'necessity' rather than a choice. Some banks have even gone as far as to call their cards "essentials". Banks and Card brands employ marketing techniques to make their cards more attractive, and to stir feelings of need within you.

One of the more popular techniques of late has been the visual tranformation of the cards themselves, from a piece of plastic that you kept in your wallet to something that you are encouraged to wear - a real accessory.

Being able to customise your card to suit your look, style or personality has been pushed as an advantage of such cards over others. But the appearance of a card has no bearing on how it works (unless it's too small to be used in an ATM) or whether it will be a good choice for you as a cardholder.

Ultimately, they are promoting a need for your card to look good and to reflect your personality, when really there is no relationship between the two. At no point in time should anyone's identity be tied to their choice of credit card.

Despite this, there is a sense of prestige associated with certain cards. These tend to be more expensive, higher-limit cards such as gold, platinum or even 'infinite' - with people taking such pride in these 'achievements' as to effectively (and sometimes literally) be wearing their credit limits on their sleeves. One such card's marketing encourages you to "leave your bulky wallet at home and dress up with a smart, new accessory" that you can take "out on the town and show off a little".

They have made cards a lifestyle must-have through options that promise to:

It would seem that the message we're supposed to take from this is: that the colours, the rewards, the credit limits, it's all about you! You can even have one to match your shoes every day of the week!
But if you're worried about the phsyical appearance of your card, your priorities are clearly in the wrong place - and you're a prime candidate for a reality check.

Despite what their marketing and advertising may try to convince you, none of these gimmicks are essential. They may promise you more fun, a better look and everything when you want it, but do you really need a credit card (or a selection of them) to make your life better? (For starters, having lots of cards is going to cost you unnecessarily in fees.)

This is not to say that credit cards are bad, on the contrary, credit cards can be an excellent tool when managed well. But not everyone can do this, and some people may be too easily sold on features that will in no way benefit them.

Ultimately, credit cards are a matter of understanding and control.

CONTROL

You've heard the horror stories, out of control debt, compulsive spending and straight-out rip offs.

People are cutting up their cards, when the damage is already done. You may even have heard some of the extreme measures that people go to to avoid spending, such as (literally) freezing their credit cards - in a block of ice. None of these address what the real issue is - and that's one of control.

If you currently have a credit card, or are thinking of applying for one, there is one thing you must know: You can successfully use a credit card if you have strong self-control, otherwise you will be tempted to overspend and to spend impulsively. (Which is why the cards are being heavily promoted to you in the first place.)

Credit cards can eliminate the time for consideration of your spending. They promise instant gratification and encourage the belief that you can have it all - now! If you have to go to the ATM to get money before making a purchase you may re-consider whether or not you really needed to buy the item in the first place.
Spending impulsively, emotionally or to impress others can stand in the way of wealth creation.

Instant gratification, or a must-have-it-now mentality, can make you more comfortable in taking on unnecessary debt, even if you really can't afford to. Almost always it is going to cost you money to borrow money. Credit cards are also a particularly expensive form of borrowing, with a typical interest rate of 18%pa. Whatever you buy on credit will cost you more than it would have if you had paid with cash. This is unless you pay your credit card off in full every month, but 70% of cardholders don't do this.

Part of the reason for this is that credit cards encourage a disconnect between your spending of the money and the eventual bill. Before cards you could only spend what you had in your wallet or your bank account. With a card, you often don't realise how much you have spent until the monthly bill arrives.

More people are natural spenders than savers and credit cards companies know it. You should too, because unless you're not part of that majority it will affect you too. If you don't control your spending, you may end up paying a higher price than you imagined. This cost may be the loss of friends, partners, possessions or increased fighting and friction between you and those you love.

Of course, this can happen with any sort of spending, but credit cards make it easy to spend money that you don't have. Perhaps, for you, the greatest cost will not be any debt that you take on but what that debt forces you to sacrifice. Despite what we are often told, it is nearly impossible to have it all.

If you carry any balance forward from month to month there is one thing that you should do first, and that is to make sure that your card has the lowest interest rate available to you. This is an important factor in managing your credit as best you can. Why pay money to the bank when you don't have to? If your current card is not offering you the best deal possible, change it. There are many other banks and other financial institutions that would be happy to have your business. That said, don't change unless you understand how your card will (or won't) suit you. There are many 'cheap' cards out there promising you a better deal. This is not always the case, as we will show you next issue.

Short of spending less, another way to reduce your total balance is to pay a greater percentage of it every month. Paying the minimum amount on your card can take years to pay off, and cost a fortune in interest. You should keep in mind that not only can the minimum amount vary from month-to-month, it's always a good idea to pay more than the minimum. Some people believe that if they have a small balance, paying the minimum will take care of everything in little-to-no time. This is not the case.

Paying the minimum amount with a balance of $500 on a card at an interest rate of 18%pa will take you 7 years to pay off! On top of that, you would pay $365 in interest. This does not take any card fees into account, nor any additional purchases. This is just how much it will take to pay that initial $500 off. If you were to pay $150 off of that card every month, your balance would be paid in full in 3 months, and you would only have incurred $17 interest.

The conclusion?: Paying more than the minimum really does make a difference, and you should pay more than the minimum amount at every opportunity.

Irrespective of outside factors such as social pressure, or advertising, the choices that you make with your money are entirely up to you. Unless you accept responsibility for how you handle your money, and make steps to improve your control, your money cannot grow. Everyone can improve their money management, regardless of their situation. Even if you are in a sticky situation you must realise that there are things that you can do that will allow you to take control of your money and begin growing your wealth.

Interest Free Periods

One of the key features that people consider when choosing a card are the number of interest-free days. Cards that offer interest-free days often have a higher interest-rate than those without an interest-free period. If you are looking to take advantage of the interest-free period on a card you must pay your card in full each month. If you do not do this you may not receive any interest-free days at all and would be better off with the lowest interest card available to you.

What you need to know about Interest-free days:

FACT: A credit card with an interest-free period will not always cost you less in interest than one without an interest-free period.

FACT: If you do not pay the entire balance of your credit card IN FULL you will be charged interest back to the date of purchase on each item. This definately applies to balance transfers with an interest-free or low-interest period.

FACT: Unless you pay your entire current and past balance in full you will not be eligible for ANY interest-free period on ANY current or future purchases.

FACT: Interest-free days do not apply to cash advances. With cash advances you are charged interest immediately, in addition to a fee. These advances are often charged at a higher rate of interest than purchases are - up to 27%

FACT: If your card provides you with a certain number of interest-free days, you need to be aware that these are a maximum number of days. The actual interest-free period that you get on your purchases may be less, due to the date a purchase was made and the date on which your statement period ends.

What does this mean for you?

It means that if you underpay your account by even 1cent, many banks will charge you as if you had made no payments at all. When you consider this, it is a really easy way to get caught and one that can be a setback to otherwise well-laid plans to get ahead.

How seriously this will impact you will depend on how much you spend on your card.
But the upside if that this is the sort of mistake people should (hopefully) only make once or twice, before they learn the cost, first hand, of the interest-free bite.

Credit's Promise: Have It All - NOW!

Credit cards are big business, and Australian's are snatching them up - putting almost 1 million shiny new cards into their pockets in 2005 alone.

CONTROL

It's easier to spend than save

Pay in full, or lower your interest rate

Always pay more than the minimum

Control begins and ends with you.

Interest Free Periods

What you need to know about Interest-free days: