This was a question posed to us just the other day. Being a somewhat frequently asked question – particularly from our younger clients, we thought our response could be of benefit to others!
I’m a great believer in credit cards – as long as you don’t use them to spend money you don’t have!
If that sounds a bit strange, let me explain.
Interest rates on unpaid credit card bills are around 20% per annum, back-dated to the date of the original transaction so, if, when the account is due for settlement you don’t have enough money to settle the bill, you are going to get hit really hard with interest. Also, when using your credit card, don’t get sucked into “Would you like any cash out?” as the transaction for the full amount (goods and cash) will be treated as a cash withdrawal with interest charged from the date of that transaction – rather go to the nearest ATM.
However, if you only spend money that you have in a high-interest rate savings account (leaving the money in that account until the bill is due for payment) you gain the positive interest without incurring any penalty interest from the credit card company. Then, when the bill is due for payment, on the day it is due, you transfer the money onto the credit card. With positive interest rates at their current low levels, this doesn’t have a significant upside for you but you are still making a gain for doing nothing other than what you would normally do anyway. If you think about it, this strategy means that you have an extra positive balance in your savings account equal to your credit card balance all the time.
What should you be looking for?
• The longest interest-free period available – on my card, I get up to 54 days. Using this strategy, it means I have money sitting in my savings account for up to 54 days more than I would have if I used a debit card.
• The lowest fees – if there are benefits attached to the card e.g. this interest free period, points (frequent flyer, rewards of other kinds) – there is often a fee to pay for the card so check to see what the benefits are and whether you are going to use them. Again, my card comes with reward points, points that I cash in for petrol cards which I then use to fill up the car(s). So, for doing nothing more than I would do anyway, I earn points that I then use to cover a cost that I would be incurring anyway.
As I very rarely use cash putting nearly everything on my credit card I way more than cover the costs of my card with benefits that cover an expense that I would have to incur anyway. In the meantime, I have a very healthy balance sitting in my savings account.
I hope that all makes sense – so, yes, get a credit card – but use it wisely: use it often, but wisely, for everything you would now be paying cash for.
If you would like to discuss anything above in more detail, please give us a call on 07 3260 7700.
Geoff Orr and Tristan Gamack are financial advisers at Brisbane Money Management, a financial planning firm based in Brisbane with offices in both Indooroopilly and Nundah.