Step-by-Step Interest Maximisation Strategy
Posted September 7th, 2009 and last modified October 12th, 2011Credit card interest is the bane of every borrower’s existence. We’ve all heard about the occasional treat ballooning into a decades-long struggle with debt, thanks to unforgiving interest rates. Unfortunately, the numbers aren’t going anywhere anytime soon—interest is how banks stay in business, for the most part. But there are ways to turn the tables (at least partly) and make your credit card terms work for you. Here are some of them.
Use balance transfers
Pretty much every credit card issuer offers a balance transfer deal of some sort. The best ones allow you to pay off debts from other credit cards at no interest for a limited period, usually from six to twelve months, and often with a transfer fee amounting to 3% of the balance transferred. As long as you can pay it off within the given period and keep your spending in check, the interest can be your best friend—at least while it lasts.
Of course, as is often the case with banks, this friendship can easily turn sour, the Wall Street Journal warns. One missed payment can dramatically raise the rates, and a higher interest often builds up on newer debts while you’re paying off the old ones. Also, they added, approval isn’t guaranteed—banks reserve their best rates for borrowers with the best credit histories.
Pay more than the minimum
The minimum payment trap is something Australians know all too well. Of the nearly $50 billion we owe in credit card debt, $36 million continues to accrue interest mostly because of lack of pressure to pay. A borrower making a minimum payment of 2% may eventually pay off his debt only if he stops using the credit card, according to Experian, a credit reporting agency. Otherwise, it’s a downward spiral.
New laws are requiring Australian credit card issuers to be more transparent in the costs of credit card use. Among the provisions is that the contract include a warning that paying only the minimum balance will cost borrowers more over time. This way, the numbers are presented to you before signing, and you can back out if you’re not up for the responsibility.
Use your interest-free periods
Most credit cards come with interest-free periods, which keeps interest from accruing on your card for up to 55 days. The Canadian Finance Blog suggests putting your wages in a high-interest savings account and charging purchases to your credit card instead, then paying it back using your wages before the interest-free period is over. If you keep your balance at zero, you’ll pay little to no interest and what’s left of your earnings will keep earning interest on their own. You’ll also save on transaction and withdrawal fees—it’s only a few dollars a month, but it’s better than taking a loss.
Pay on time
It sounds like a no-brainer—of course you want to pay your bills on time—but it’s worth mentioning because the price of doing otherwise is much higher for credit cards. A missed payment can jack up your interest rate to as much as 30%, and it doesn’t even have to be on the same account. Miss your phone bill, water bill, or the bill on another credit card, and your bank will hear about it. You literally wake up the next day owing hundreds of dollars more because your interest rates doubled overnight.
Most Australian banks have done away with the universal default clause after some clamour from borrowers and government. But stay on the safe side by paying all your bills on time. The Wall Street Journal suggests automating all your payments and trying to pay off your balance in full every month. If that’s not an option, re-read the fine print on your credit card contract and check for anything alluding to universal default.
Set up a budget
If you’re lucky enough to get a decent interest rate, you can use your credit card as a budgeting tool. Get an idea of your total annual spending (taking light and heavy seasons into account) and spread it out over twelve months. Pay off the same amount every month so you don’t have to panic whenever expensive months such as the holidays roll in. Lighter months can easily make up for them. Even if you carry a balance from time to time, the interest won’t build up as much. Another advantage to this is that you can track your spending—every purchase is recorded and you can see where you can afford to cut corners.
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