Credit cards are not the problem

So often, Australia’s household debt problem is blamed on credit cards, but plastic is not the problem. Greed, impatience and bad money attitude are the problems.

When credit cards were first introduced, back in the good old days they were seen as an emergency only safeguard. People would use the card only in emergencies, and then swiftly bring the balance back to zero when the cash flowed in.

But somehow, the reality that every card purchase is racking up more and more debt at around 20% interest has been forgotten in favour of buying endless must-have stuff.   And somehow, earning reward points makes it all ok.

It’s not ok.  When you start to believe that a credit card is additional income and an extension of available cash, you are in real trouble.  And the promise of reward points is merely a marketing mirage.  Here are the three (3) must-obey rules of credit cards:

The first rule of cards is that if you can’t repay your credit card to zero each and every month, then you are using it incorrectly.

The second rule of cards is that if you are chasing reward points, you will almost certainly have a high rate card.  That means you are paying around 20% per year on any outstanding monthly balances.  So the closer you get to free stuff, the deeper your debt becomes and the higher your monthly interest payments climb.

You don’t necessarily need to cut up your credit card, you just need to change the way you use them and take advantage of what they offer.

  1. With common sense and a budget, the convenience of a card saves time looking for an ATM or having to keep cash on hand; and it also keeps a record of your spending
  2. Sometimes the only way to make an internet purchase is to use a credit card
  3. Credit card is a very convenient way to pay and deal with currency conversion while travelling. It means you don’t have to carry a lot of cash and some cards offer related benefits such as travel & emergency assistance insurance

The third rule of cards is that you rule your credit card; it doesn’t rule you.



PS. Please try hard to find some money to save.  You’ll thank me later.

Dying With Credit Card Debt – What Really Happens

One of the biggest risks of living your life in credit card debt is getting used to it.  Allowing credit card debt repayment to become a normal part of your life is not a great idea.  There can be serious repercussions.  In life, carrying card debt seriously erodes your ability to save or sometimes even your ability to survive.  And if you think card debt is normal in life then you probably think it is okay to die with it as well.

Contrary to popular belief, if you die with card debt, it does not automatically die with you.  Credit card reward points might die with you depending on the provider’s terms and conditions, but the debt itself hangs around and, one way or another will adversely affect your family.

If you die as a joint owner of a credit card then the other joint owner, commonly your spouse, will be responsible for all of the debt whether they created it or not.

If you are the sole owner of the card, the debt still lives on to be repaid from your estate if there is enough money and saleable assets to cover it.  If the estate is insolvent, the card provider may consider writing off the outstanding debt; or they may not.  Depending on the circumstances, they may try to aim up at your surviving spouse if he or she holds other accounts with them.

But whatever the outcome, dying with card debt will have a negative impact on your family.  If a family member isn’t responsible directly, then it is likely to eat into your estate and subsequently decrease their inheritance.

The Credit Card Trap

You and almost half of all Australians are repaying credit card debt but what you may not realise is that you are being set up to be paying off credit card debt for the rest of your life.

The trap is this:

  • Believing that your minimum credit card payment amount is enough to avoid interest charges; and
  • Believing that you’ll get your credit card balance down to zero quickly if you keep paying the minimum amount (only) every month

In fact, the minimum payment amount is only the bare minimum you have to pay to meet the obligations of your credit card’s contract.  All you are doing is avoiding a late payment fee ensuring you can keep using your card.

If you continue to pay the minimum payment amount in the belief that you’ll get your credit card balance down to zero quickly, it will actually take you decades to pay off your debt.

And this is where the banks make their money.

If you only pay the minimum payment amount you’ll be charged a month’s worth of interest calculated on your balance each day for that statement period.  You will also lose your interest-free days for the next statement period, meaning interest charges will keep adding up.

So if you didn’t pay your balance (closing balance on your statement) in full last month, you will be paying interest on interest.

So the moral of the story is pay off your credit cards and take advantage of the interest free feature of your card.

Keep saving