Money & Banking
4 credit card rules you should never break
According to a study from finder.com.au, 40% of Australians own one credit card, 19% own two credit cards and 8% own three or more. Unsurprisingly, cardholders with several cards were more likely to have bigger credit card debts than those with just one credit card. The study found that those with several cards carried on average $6,500 of credit card debt – more than double the national average.
However, credit cards are not necessarily a bad thing, says Prudential’s financial wellness advocate Tiffany Aliche. “It’s a myth that credit cards are innately bad,” she says. “Think of them instead like a tool, just like a hammer. You can pick that hammer up and build a house, or you can pick up that same hammer and destroy that same house. It depends entirely on the user.”
So, is there a method to the credit-card madness? We ask trusty financial experts for their top credit card dos and don’ts.
1. Stick to one or two cards
It’s a common belief that to have good credit, you need credit cards. The truth is yes… and no. Financial wellness advocate Felicity Aliche recommends keeping at least one but not more than three cards. “Remember, if you have no credit history, you are a bad borrower,” she says. “It’s just like if my 16-year-old relative said, ‘Look, I’ve never been in an accident,’ yet she’s never driven a car, so therefore she’s a bad driver. Well, the same goes for credit.”
However, that doesn’t mean you need to fill your wallet with plastic in order to have good credit, either. “Because the word ‘credit’ is in credit cards, people associate the two, but your credit score is about much more than that,” she says. “Your credit score encompasses many more aspects than cards. It’s about any time you borrow and pay back money, whether it’s a mortgage, car loan, student loan, even your utility bills.”
2. Remember the 30 per cent rule
You could be paying your monthly credit card bill on time, but if you’re continually carrying a high balance, that will bring your credit score down. “Think of 30% as your new maximum, and realise that anything above that is going to tank your score,” says Aliche. Gearing up for a big purchase, like a home or car? Then aim for 15%, she says.
3. Shop around
Interest rates may be low for those with a mortgage, but credit card interest rates haven’t moved much. However, that doesn’t mean you shouldn’t look for a lower rate. Let’s say you bring your interest rate down from 20% to 15%. That means for every $100, $20 is going to interest and fees, versus $15. That’s quite an amount over a period of time. “That’s why I suggest that people regularly negotiate their rate. Pick a date every year that you spend on negotiating your fee, and you may be surprised how easy it can be to lower it,” says Aliche. Better still, try and pay off the whole amount each month so you don’t pay any interest at all.
4. Look for cash-back cards
Cashback credit cards are fairly new to Australia so it’s crucial to understand your money reward options before choosing that new piece of plastic to sit in your wallet, says mozo.com.au.
Cash back credit cards work in a similar way to reward credit cards like platinum and frequent flyer cards: every time you use your card to buy something you earn reward points which you then redeem for products or flights. However, with cash back cards your points are converted into cash.
“I’m a big believer in cash-back cards,” says Foguth. “I put everything – petrol, restaurants, you name it – on one credit card that offers cashback. Even if I get 1% cashback, that’s 1% more than if I used a $100 note in my pocket,” he says.