Understanding that credit cards in themselves are not ‘bad’ can help us make better choices. By learning what you want and need from a card can allow you to choose a card that is ‘good’ for you, while avoiding dealing with that card in a way that is ‘bad’ for you. In fact, to show you that credit cards are not inherently ‘bad’, we’re going to show you how they can be ‘good’, in the many ways they can help you save.
Saving Tip #1. Pay your balance in full
Carrying a balance on a credit card is a big no-no. Why? When you carry a balance on your card, it attracts interest. So, the following month, when your bill is due, not only do you have to pay back your previous month’s spending, you also have to pay back any interest it has accrued. In addition, you will have to pay off any new spending on the card, plus the interest that has accrued on that.
You see, interest free periods do not apply unless you clear your balance in the previous month, so any new spending starts accruing interest from the date of purchase. You can see how easy it could be to get into trouble, especially if you have a card with a high interest rate reaching 22% or 23% p.a.
What about paying the minimum? When a credit card statement is due, cardholders have to pay back at least the minimum amount, which is usually either 1.5% to 2.5% of the balance, or a set dollar amount. While it can be tempting to only pay the minimum – especially when funds are tight – this can lead to all sorts of trouble.
Say you have a balance of $2,000 on a card with an APR of 18%. If you make only the minimum payment of 2.5%, that balance could take over 15 years to pay off, costing you a total of $2,240 in interest. That doesn’t even factor in any annual fees you might be paying, or any new spending you might do.
If you want to save on your credit card, the single most important thing you can do is pay off your balance by the due date. However, if that’s not possible – if you know you might occasionally carry a balance – a low rate card may be your best bet. With the right low rate card, you could pay 9% or 10% p.a. interest on your balance, instead of almost double that on other cards.
How much could you save by switching to a low rate card? A lot, according to an ASIC review released last year. After a survey of 21.4 million credit card accounts opened in the five years to June 2018, ASIC estimated consumers could have saved $621 million in just one year if they had switched to a more appropriate credit card with a lower interest rate and fewer features (1).
Saving Tip #2. Avoid unnecessary fees
ASIC’s review also highlighted another issue: fees. According to the data, Australians paid an astounding $1.5 billion in credit card fees the previous year, made up of annual fees, late payment fees and other fees (2). Something many cardholders often forget is that fees on credit cards can, for the most part, be avoided.
Just because you have a credit card in your wallet does not mean you have to pay to keep it there. Here are some of the most common credit card fees and how you can avoid them.
There are heaps of credit cards with no annual fee. While they tend to be light on features and rewards, they do offer the basics, while providing access to credit. If that’s all you need, or if you’re looking for ways to cut costs, a no annual fee card could be the ideal option.
Rewards Program Fees
Cards may charge a fee to opt in to a rewards program. By opting out, you can avoid this fee.
Currency Conversion Fees
Also known as foreign transaction fees, these fees are charged when you carry out a transaction in another currency, either in person overseas or online via an international retailer. While most cards charge 2% to 4% for this, you can find cards that have no currency conversion fee, helping you to save if you travel overseas regularly or enjoy shopping online.
Late Payments Fees
If your payments are made after the due date, your card provider may charge you a fee. While there are cards that do not charge a late payments fee, the easiest way to avoid this fee is to always make your payments on time. This could mean setting up an automatic payment from your bank, or setting a reminder on your phone.
Cash Advance Fees
When you use your card for a cash advance, you may get charged a cash advance fee, either as a percentage of the transaction or a flat fee amount. You will also pay interest (usually at a higher cash advance rate) from the date of the transaction, as there are no interest free periods on cash advances. While they can be handy in an emergency, cash advances are best avoided. Some cash advance examples include:
- A cash withdrawal using your credit card at an ATM or over the counter.
- Money transferred out of your credit card and into another account.
- Using your credit card for gambling.
- Bills paid with your credit card over the counter at another bank or at a post office.
- Things bought that work more or less like cash, like traveller’s cheques or gift cards.
Saving Tip #3. Learn how your interest free period works
When comparing credit cards, you may have noticed cards often advertise ‘up to 44 days’ or ‘up to 55 days’ interest free. Great, you can enjoy 44 or 55 days interest free on all your purchases on these cards, right? Nope. While a card’s interest free feature can certainly help you save money, you have to understand how it works first.
The first thing to note on this feature is that all-important ‘up to’. Not all purchases will get the maximum number of interest free days. Instead, it is based on when the purchase is made. On a card with up to 55 days interest free, purchases made on day 1 of the statement cycle will have 55 days interest free, while those made on day 30 will only have 25 days interest free.
Another thing to note on this feature is that it only applies to purchases. If you make a cash advance on your card, no interest free days apply so you will pay interest from the date of the transaction.
Lastly, your new purchases will not receive any interest free days if you have an unpaid balance on your card. This could apply to you if you have a balance transfer on your card, or if you failed to clear your balance in the previous month. So, if you have a balance carried over, each purchase you make will start to accrue interest from the day you make it.
Saving Tip #4. Take advantage of a 0% purchase offer
If your card’s standard interest free feature doesn’t provide enough time to pay off say, a larger purchase, a card with a 0% purchase offer may be just what you need. Purchase offers are introductory offers designed to attract new cardholders, offering a much lower introductory purchase rate for a certain period of time.
Let’s say you want to borrow $8,000 for a holiday. You know you can pay it back within a year, so you are looking at different ways to finance it.
- You could opt for an unsecured fixed rate personal loan. A one year loan with an APR of 13.5% and $10 monthly service fee would have monthly repayments of $726 per month, meaning you pay back a total of $8,717. That means, on top of a $150 application fee, you would pay $717 in interest.
- Alternatively, you could apply for a card with no annual fee for the first year and 0% p.a. on purchases for 12 months. With this card, you could borrow that $8,000 to pay it all back within a year, with no interest and no fees to pay. You borrow $8,000, you repay $8,000.
However, there are some important things to remember when utilising a purchase offer.
- The amount you can borrow will depend on your approved credit limit.
- With no fixed repayment structure, you will need to be disciplined with your own repayments, making sure you pay back everything you have borrowed before the introductory period ends.
- If you fail to repay your balance, it will revert to card’s purchase rate at the end of the introductory period. On a card with a high purchase rate, this may make your balance more difficult to pay off – and more expensive than the alternative personal loan option.
- If you choose to keep the card after the introductory period ends, be aware of how much its standard annual fee is, and whether the card suits your needs.
Taking all of that into account, a purchase offer can provide a number of benefits.
- The right purchase offer could save you money on interest (and fees).
- You can use as much as you need, up to your approved credit limit.
- You can use your card directly to pay for your purchase.
- If you choose a card with included insurances (this may come with a higher annual fee), your purchase could be covered by travel insurance and various purchase covers, such as extended warranty and price guarantee.
Saving Tip #5. Utilise a balance transfer offer
If you have a balance on your card that you would like to pay off, a balance transfer could help you do just that, while saving you lots in interest. With a balance transfer offer, you transfer the balance from your existing cards onto the new card to take advantage of a much lower introductory rate for a specified period of time.
Say you have a balance of $5,000 on a card with a purchase rate of 22% p.a. By transferring to a card with a 0% p.a. balance transfer offer over 18 months (with no balance transfer fee and an annual fee of $59), you could save $1,286 over that 18 month period.
Just like a purchase offer, balance transfer offers must be dealt with correctly. To make the most of your balance transfer – and avoid getting yourself into trouble – here are some rules to follow.
- Don’t leave your repayments to the last few months of the introductory period.
- Work out how much you will need to pay off each month to clear your transferred balance within the introductory period.
- Set up automatic repayments after pay day.
- Avoid spending on the card until the balance is paid off. New purchases will accrue interest from the day they are made, and will make paying off the entire balance more difficult.
When comparing balance transfer offers, keep a look out for:
- Balance Transfer Fees: This will be expressed as a percentage of the amount transferred and will have to be paid off alongside the transferred balance.
- Transfer Limits: Some cards limit the amount transferred to a certain percentage of the approved credit limit.
- Annual Fees: Choosing a card with a lower annual fee will make paying off the transferred balance easier.
- Revert Rate: This is the rate your transferred balance will revert to if it remains unpaid after the introductory period. Some cards revert to a high cash advance rate, making that unpaid balance more difficult to pay off.
- Features: Some balance transfer cards will come with no frills, while some will offer features and rewards. Paying off your transferred balance may be easier on a no frills card as the annual fee will be lower, and there is no incentive for new spending.
Saving Tip #6. Reduce your credit limit
In terms of everyday use – when you are not utilising a purchase offer or balance transfer deal – you could save on your card by reducing your credit limit. How does this work? For some cardholders, their higher credit limits may provide temptation to spend more than they can afford. So, to reduce that temptation, reduce the credit limit.
You can reduce your limit in branch, over the phone and online. In most cases, your account will be updated within 1-2 business days. If you are planning a larger purchase in the future, you can request an increase to your credit limit – but just be aware, you may have to go through an approval process with your card provider to get that increase approved.
Saving Tip #7. Check out cashback offers
Cashback cards are a type of rewards card that provide cash back on cardholder spending. The amount of cashback you earn will depend on the card, but it will usually be a certain percentage of your spend, which is limited to a total overall amount per month or per year. These cashback programs are usually pretty simple to understand, so can provide a great alternative to cardholders who don’t want to get into a complex rewards system.
However, making the most of these cards means understanding how they work – for example, knowing which purchases will not attract cashback, and any limits to cashback that may apply. As with any rewards card, cashback programs tend to reward bigger spenders. So, try to channel as much of your spending through the card, making sure you can afford to pay it all back before it starts attracting interest.
To find out whether a cashback card is going to offer value to you, first calculate your spend for the year. You can then work out how much cashback you will earn, taking into consideration any limits. Now subtract the card’s annual fee from that total to calculate how much you earn over and above that. While the total may not be mind-blowing, if done right, it does allow you access to credit for free – by covering your annual fee – while giving you a little something extra on top.
Saving Tip #8. Consider a bonus points offer
If you are considering a more traditional rewards program, choosing a card that has an introductory bonus points offer could really boost your points balance. By paying close attention to the card’s earn rate, to any points caps that apply, and to its annual fee, you could find a rewards card that not only rewards your spending, but starts you off with a valuable points boost.
Before choosing an offer, find out more about the rewards program and what kind of value the points bonus provides. You will usually find you get more value when points are redeemed for travel – on flights or upgrades. By redeeming your points correctly, you could see hundreds of dollars of value. If you were planning on taking a trip anyway, this could save you a significant amount on your travel costs.
When comparing offers, keep an eye out for cards that combine a good bonus points offer with a reduced annual fee in the first year, as these offer even more value. Ongoing, think about whether the card still makes sense for you paying the full annual fee – and always make sure you pay off your balance each month before it starts accruing interest.
Saving Tip #9. Make the most of your card’s features
By using your card’s features correctly, you could save money that you would otherwise have to spend elsewhere. Here are some examples of features that could help you save:
Travel Insurance: High end cards typically offer travel insurance on overseas trips. As long as you understand how to activate this cover, as well as any limitations and exclusions that may apply, it could save you the time of searching and the cost of purchasing standalone cover.
Free Hotel Stays: Your card may offer a complimentary night’s stay at partner hotels, or a ‘pay for three, get one night free’ offer. Whether you just fancy getting away or you need to travel frequently anyway, this could significantly reduce your accommodation costs.
Airport Lounge Access: If you want to access airport lounges, you will usually have to pay for the privilege. Unless your card provides access, that is. Depending on your card, you may be provided with a few invitations per year or unlimited access, or it may give you access to a lounge program, such as Priority Pass.
Travel Credit: Another great money-saver for those who love to travel, travel credit is usually provided in a dollar amount each year to cardholders, which can then be used to book travel arrangements. If you are travelling anyway, this feature can help to balance out the cost of the annual fee, allowing you to enjoy the rest of the card’s features for much less, or even for ‘free’.
Price Guarantee: What’s worse than buying something and then seeing it somewhere else at a cheaper price? A price guarantee feature could allow you to get the difference back if this happens to you. Bear in mind certain restrictions apply, so read the PDS for full details.
Extended Warranty: When you buy something in-store, especially large, expensive items, the salesperson will often try to upsell you an extended warranty. Alternatively, your card may offer an extended warranty feature. While cover varies, this will usually double the manufacturer’s warranty, up to a maximum of a year.
It is worth pointing out that cards with these types of features tend to have a higher annual fee. So are you really ‘saving’ money on them? That really depends on whether you make full use of them, and whether you would pay more elsewhere for what the features are offering. If you get more back in value than you pay out in annual fees, you could indeed save money.
Saving Tip #10. Choose the right card
You would think this goes without saying, but not everyone chooses the right card for them. When comparing the options, it can be all too easy to get swept up in introductory offers, features and rewards, thinking they look great, so they must be worth it. But, they may not offer value to you, your lifestyle, and your spending habits.
The best way to save on any credit card is to understand what you need from a card, and then compare what’s on offer to find the best match.
- If you always carry a balance on your card, a card with a super low rate may be your best bet.
- If you have credit card debt that you want to pay off, a balance transfer card could help you do that.
- If you only keep a card for emergencies, or you only use it occasionally, a no annual fee card could be the one for you.
- If you are not interested in features and rewards, a no frills card could help you keep things simple while you keep costs down.
- If you are a big spender and always clear your balance each month, a rewards card could give you something back on your spending.
- If you use your card for a big supermarket shop each week, a loyalty rewards card for that supermarket could give you cashback to spend in-store.
- If you travel frequently, a frequent flyer card with travel-related features could work well for you.
You may consider using different cards for different tasks. For example, if you have a balance you want to pay off, but you want to earn rewards at the same time, you may choose a no annual fee card with a balance transfer offer, plus a rewards card that rewards your spending.
However, to make multiple cards work – in any situation – you need to remember the following things:
- Only spend what you can afford to pay back.
- If you are trying to pay off a balance transfer, only take on new spending if you know you can pay off the transferred balance and that new spending without struggling.
- Don’t get carried away knowing you have multiple spending limits.
- Only take out more than one card if you know you can manage more than one account efficiently.
- Don’t apply for multiple cards at once.
- Consider closing cards you don’t need once they have fulfilled their purpose.
- Make sure you are not paying more in annual fees than the value of what your cards offer in return.
Used correctly, your card could help you save, while offering a number of handy features on the side. The key is to understand your needs as a cardholder, to then choose a card that suits you, and use it wisely. If you’d like to find out more about credit cards and how you can make them work for you, check out our sister site CreditCard EDU for 100% free online credit card courses.