The dangers of credit card interest!
CREDIT CARDS CAN BE USEFUL.
If you’re planning on adding a shiny new credit card to your wallet, you need to know how they work and how to take advantage of any interest free offerings. They can be tricky to understand. Here we’ll try and point out the tricks to managing your credit card.
There’s a whole bunch of reasons some people apply for a credit card. Sometimes it’s so they can make larger purchases, collect frequent flyer points and sometimes get additional benefits like complementary (read: free!) travel insurance. It can make travelling easier [no need for cash] and paying for things over the counter quicker and safer. It can also be used for cash flow management if you run a small business. And we all know that it’s basically the only way you can pay for things over the internet.
They may also offer something else: ‘interest free’ days.
That means, for up to a certain amount of days [e.g. 55 days], you don’t get charged interest on the item you purchased on your credit card (which, essentially, is money on loan from us). When you do start getting charged interest, it’ll only be from the end of your statement period which is usually 31 days.
IS IT INTEREST FREE?
So you paid for that expensive lunch with your bestie on your credit card. Let’s say for $30 on 1 December. Let’s say your credit card ‘statement period’ also starts on 1 December. That means you have 55 days from the lunch payment to pay off the $30 without incurring interest.
On 17 December, using your credit card, you also purchase a set of underpants for your partner’s Christmas present. They’re pretty sexy, so they cost you $100. For this purchase, you now have only 38 days (55 days – 17 days) to pay back the underpants within the interest free period on your credit card.
Because your wise with your money, you’ve setup up a sweep from your savings account to your credit card account, before the payment date, at the end of the interest free period – that would be January 23.
WHAT IF I DIDN’T PAY?
If you’re unwise with your money, and you miss the interest free payment period on your credit card, the bank will charge you interest on the $130 of purchases above. That interest is calculated from the end of the 31 day statement period, in this case, that’s December 31. In 2019, new legislation meant that banks charged interest from the end of the statement period instead of the date the purchase was made.
So, for the example above, you would start being charged interest on the $130 from December 31 – not December 1 and December 17.
STATEMENT DATES
Sometimes, the first day of your statement period, and the 55 days, isn’t actually the first day of the month. It might start half way through depending on your statement period. So, if your statement period starts on 15th of the month, you’ll have 55 days interest free from the 15th.
Your statement period and due date are both stated in your credit card statement. So it’s a good thing to keep an eye on so you know what cut off date in the following month is. That way you’ll know the date you need to pay your credit card by so you don’t pay any interest.
It’s also important to know rules changes, special conditions apply and different banks may apply additional or different rules for their credit cards. For example, if you have a balance transfer on your card you typically won’t receive any interest free days at all
YOUR FINANCES
A credit card can be an integral feature to your own personal finances and how you manage your money. They certainly make transactions and interacting in this technological world we live in much easier. However, they do have the traps and pitfalls – especially if you’re late with payments and interest starts to snowball. If that’s the case, they can be quite dangerous. This is why banks love to increase your credit limit. A credit card is truly profitable to them, when you can only meet the minimum repayment amount and get trapped into paying very high interest on a remaining balance.
If you’d like help with getting out of a credit card, or would just like to talk to someone about managing your personal or business cashflow, please get in touch with us. We’re qualified financial advisors and accountants and can certainly help you with any financial situation or outcome you’re looking for.
– 2 December 2020 –
General Advice Warning
In preparing this article, Praescius Financial Consultants NSW Pty Ltd, Praescius Financial Consultants NT Pty Ltd, Praescius Financial Consultants HB Pty Ltd and Praescius Financial Brisbane Pty Ltd have not considered your personal circumstances, goals or objectives; as such the information, commentary and assertions made within this article may not be suitable to you. Please seek personal financial advice prior to acting on this information, or making a decision regarding the choice of a financial product or strategy. Further information and disclosures can be found in our Financial Services Guide or by contacting us on the phone numbers provided.
Praescius Financial Consultants NSW Pty Ltd, Praescius Financial Consultants NT Pty Ltd, Praescius Financial Consultants HB Pty Ltd and Praescius Financial Brisbane Pty Ltd are authorised representatives of Praescius Financial Holdings Pty Ltd ABN 14 610 960 980 AFSL 486455, 2a/57-59 Oxford Street, Bulimba Qld 4171.
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