So, you’re thinking…“Ok, despite your last Post, I’m going to get a credit card. I know you have one. And I want one too. Besides, like you said, society is designed for us to have one. Um, which one should I get?”
A good friend of mine is obsessed with buying everything she possibly can on her credit card. She does this because she wants the points. From what I can gather, she gets pretty good points and I know she’s taken a few business class trips to Europe as a result of those points.
Are you ready for it? I am…here it comes…. BUT….
Recently when she was planning her latest overseas sojourn to the USA, I suggested she buy some currency when the Aussie dollar hit $1.02 – the first time we’d been above parity in my life time. However, she didn’t want to. If her reasoning had been, I’ve heard rumours we might actually get to $1.20, so I think I might risk it, I would have understood. I’m not much of a gambler so I myself would have probably jumped at the $1.02, but I understand that some people put more faith in their luck than me, so I get it.
The thing is – that wasn’t her reasoning. Her reasoning was that if she bought Travellers’ Cheques (or some other form of currency exchange), she wouldn’t be able to use her credit card and get the points.
Here comes the clincher. I recently discovered a credit card that offers no international transaction fees – nada, zip, zilch. I don’t know about you, but this is HUGE! It would save you so much on an international trip. How amazing is that? I haven’t been overseas in nearly two years but I still drooled at the thought of having one of these credit cards.
Unlike me, my friend travels overseas annually. I couldn’t wait to ring her and tell her about this credit card find. And I most certainly couldn’t imagine her rejection of this blatantly cool card. She didn’t want one (despite the fee saving), because she wouldn’t be able to use her normal credit card to get the points.
Now, my friend is on the intelligent side of life. And she’s normally a very practical cost conservative person, which made all of this seem a little ludicrous to me. How could those numbers add up?
My background belief in regards to credit cards is a memory of a financial advisor on TV saying, ‘go for the credit cards with the lowest interest rates and the lowest fees – avoid point credit cards at all possible costs.’ I’ve kept this in mind and I assumed that it was pretty common knowledge that they are a bit of an advertising gimmick that cost us more money at the end of the day.
Having said that, when I married my husband he had the Westpac Altitude Gold Card and I must admit I did find the points thing to be a little bit of a novelty. So we’ve kept it.
But, if we don’t make our full repayment at the end of our statement cycle, our interest rate is the high end 19.99% and, in addition to that, we have an annual card fee of $150.00. My friend has the Westpac Altitude Platinum Card, which means she has the same interest rate, but pays $295 a year to get an extra point per dollar spent when she uses the Amex card attached to the account.
My friend is the kind of person who pays her credit card off to the cent every month. As a result, her points loaded card only really costs her $295 per year. I’m the kind of person who tries to pay her credit card off to the cent every month and comes close, but not always all the way.
My question for today then is… What really is the best option for your credit card and does that best option vary from person to person?
The easiest way to start this is to assess what kind of person you are.
We’ll limit it to three categories.
Category A: I pay my credit card off by the due date every month
Category B: I mostly pay my credit card off
Category C: I’m not very good at paying my credit card off.
If you are Category C, then your answer is a no brainer. You should not have a credit card. Or, if you must have a credit card, you should make sure that you own a lot of bank shares! And if you must have a credit card (but really you musn’t) and you can’t afford bank shares, then stick to a super low interest rate with super low fees(credit union if possible), keep it to one credit card and keep your limit under $2000.
So, because I like to think of myself as an explorer and because, nerdy me, thinks it will be fun to see a few scenarios play out – I’ve decided to check out the lifestyles of Jack and Jill and their friends. Let’s see which credit card suits them best. That way, if you do fit into Category C and you ignored my last paragraph, then perhaps this will bring my point home.
I give you the return of Jack and Jill.
Jack and Jill – the Sticklers have sold their home. They know what it is like to be in debt and they are most upset with the banks. They’re not interested in re-living any of that again (this is SO going to be me in a few years time!)
They have a visa debit card.
With a visa debit card, Jack and Jill can do everything that a person with a credit card can do with the exception of get into debt or get points for spending a lot of money. This doesn’t bother them too much, because they now have a three day weekend as a result of not needing to work so much.
Things to know about Jack and Jill’s Visa Debit Card –
- It has no fees
- They never pay interest on it
- They are only able to spend money that is already in their bank account.
- It is a safe gimmick free option.
Conclusion – a Visa Debit Card is a very safe way to spend your money. By only spending money that you have, you are much more in control of your life. There are no perks but no pitfalls either.
I think that, if you have ever had credit card debt, then you should avoid having a credit card ever again. This card allows you to do that.
Jack and Jill’s Kids – The Not So Sticklers Jack and Jill’s Kids, let’s call them Babe and Ruth, have grown up under the watchful eye of their parents but they’re young and like to take a few risks.
Babe and Ruth both have a platinum rewards card.
Babe makes a lot of money, but she also spends a lot of money. She pays her card off to the cent every month. She avoids transactions which accrue fees such as atm cash withdrawals. Her one exception to this rule is that she uses her credit card for everything, even her rent. This attracts a surcharge of approximately $40.00 on her credit card each month. Due to all her spending, she gets approximately 15,000 rewards points each month. She takes advantage of just about any bonus points offers she can and as a result, she takes a return business class flight to Europe once every two years that is paid in entirety by points.
She looks at it this way. $40x24months+2 years worth of annual fees at $295/year = $1550.00 and she figures, that’s about the cheapest business class ticket money can buy. She knows that she would never actually pay for a business class ticket, but she really really likes taking business class trips, so this is her way of spoiling herself.
Babe also takes into account the fact that she would have paid tax on the interest earned on the $1550.00 but that she doesn’t pay tax on her points. This can make a difference for her because she is in quite a high tax threshold.
Ruth thinks Babe is on a winning ticket, so she tries to do the same thing as her sister. The thing is, Ruth is less adept at paying her card off each month and sometimes forgets to pay by the due date. Ruth is also in a slightly different position because she has a mortgage, as such extra money spent to get extra points on her credit card could be offsetting her mortgage rather than accruing interest like it would for Babe.
Over two years, Ruth pays her credit card off late 9 times ($81.00). She has a number of cash advances which she forgets to pay off as soon as she can, instead thinking that they can wait until the due date. She doesn’t realise that there is no interest free period on cash advances and that she is paying 20.75% on the cash advances that she has made.
Over two years, Ruth has spent less on her credit card than Babe and not been as savvy with the bonus points promotions. She has half as many points as Babe and has paid significantly more than Babe has in interest. Because she can’t afford to do the business class trip, she uses her points to get a camera that she could have bought on sale for $400.
Conclusion – a Rewards Card is a very risky way to spend your money. However, if you spend a lot and are extremely disciplined in your credit card use, they can be used to your advantage. Unless you can afford a platinum rewards card, the points are more gimmicky than anything else. If you cannot use this credit card with strict regulation, then you should not have one. And yes, that includes me too. I’ll get rid of mine as soon as I possibly can.
And, in my opinion, Babe gets enough points on her credit card already. She doesn’t need to be so greedy when she goes overseas. She should get one of those awesome international travel cards that I mentioned earlier and skip the points thing when she is travelling.
John and Jane (friends of Jack and Jill who can’t seem to help spending beyond their means – don’t scoff… John and Jane are the norm!) – John and Jane have a mortgage which is a little bit of a struggle to pay off.
They have a low fee personal card and a low interest rate card for business.
John and Jane manage to pay the personal card off each month. But as a general rule don’t manage much better than the minimum on the business card.
John and Jane would love to pay off both credit cards and just run off visa debit cards. But that’s not really an option.
Instead they look at doing a balance transfer on their business card to another bank’s low interest credit card. This offers an advantage to them because they’re paying a lower interest rate on the existing debt and the same interest rate on the new debt. Their goal is to be a lot more careful with their spending and to have the credit card paid off within 18 months. They’ve therefore decided to go with the current ANZ promotion which offers 2.9% for 18 months. In addition to this, they want to try and pay for all future business expenses with money that is already in their pockets.
Another option John and Jane could have considered is switching to a credit union for their credit card. This is because credit unions typically offer lower interest and lower fees anyway (check out the comparison table below).
With any of the options John and Jane would have to look at their money management techniques and start making some radical changes. If they don’t, they will be in a never-ending cycle of credit card debt that will eventually blow out of control.
Conclusion – a low fee or low interest Card isn’t much chop – at least from the Big Four. Credit Unions offer better fee and better interest rates on their cards. However, if you can’t get a credit union credit card, or you want to keep all your banking with the same bank, and you don’t use your credit card much, then a low fee card is the way to go. But if you don’t manage to get your credit card paid off each month, then the low interest is your best bet. If you can swap your credit card to a credit union, don’t hesitate. The deal is MUCH better.
That’s about it for our scenarios. Let me know if there’s one you want me to go over. For now, we’re going to do a little table of people who could safely have a credit card, people who shouldn’t really have a credit card and people who really shouldn’t have a credit card.
|It’s ok to have a credit card If you (do all of the below):||It’s probably not a good idea to have a credit card if you (do some of the below)||You should seriously cut your credit cards up and pay them off asap if you (do any of the below)|
AND…just in case you haven’t had enough of tables, here is one I made with a run-down comparison of the Big Four, a smaller bank (Bankwest) and a credit union (Teacher’s Credit Union). These stats will of course change, but I’ll try and keep an eye on them. If you find I’ve gotten slack, then there is a pretty good site called www.creditcard.com.au which does an extensive comparison but keeps each search within the card category i.e. rewards cards.
Credit Card Comparisons of both Type and Bank
Well Folks – That’s all for today’s blog. Please let me know if this helped. If it didn’t, what do you need to know that I didn’t cover? Email me