How to Grinch the bank this Christmas and avoid a credit hangover
Christmas has arrived, and with it, so has the dreaded spending.
Christmas is fast approaching, and for many Australians this means debt. Different research puts the total we spend on Christmas gifts anywhere around the $500 mark and this is excluding the cost of food and other Christmas expenses: the all-important Christmas tree, the Christmas Day feast and the costs of travelling to see interstate or overseas family.
According to a 2014 Credit Card Finder Christmas survey, $27 billion is expected to be spent on credit cards this December. This is compared to $26 billion that was spent in December of 2013.
With the amount Australians are going to spend on their card, it’s all about planning how you use your card and making the most of the promotional features. There are cards to spend with and cards to consolidate and pay off your debt with. The key is knowing when to use what, and whether the cards on offer are suited to your personal circumstances.
Cards to consider spending with
Credit card purchase interest rates can vary between 10% and 20% for some cards — so it’s crucial that you go into the festive season with the right credit card. Consider this: a low rate credit card charges on average about 13% interest on purchases, a frequent flyer card will charge around 20%. A difference of 7% on a balance of $1000 equals an extra $716 in interest payments and approximately 3 years extra to pay off the card, assuming only a minimum repayment of 2% or $20 was made each month.
Avoid the Christmas credit hangover: cards to get you out of the red
Imagine this (for some, it shouldn’t be too much of a stretch), you’ve racked up charges on your credit card over Christmas and you’re wondering how to go about managing the debt. A balance transfer might be a sensible option.
Five golden balance transfer rules to remember this Christmas
- You can only transfer up between 70-95% of your available credit limit. This figure changes between providers, but as a general rule of thumb, you can expect to transfer 90-95% of your credit limit on the card you want to transfer to. For instance, if you want to transfer $950 from card A to card B, card B will need a credit limit of at least $1000.
- You can not take advantage of a promotional balance transfer offer if you’re transferring between two related credit cards. In order for a balance transfer to be accepted, you need to be transferring the balance between two non-related credit cards. For instance, a balance transfer will not be accepted between two ANZ credit cards, or for that matter, between two ‘non-related’ cards where one is the credit provider for the other. HSBC provide credit to Woolworths to fund their credit operations and subsequently balance transfers are not allowed between these providers.
- No interest-free days. You do not get interest-free days if you are carrying a balance transfer balance. Interest free days on purchases do not apply if you’re carrying a promotional balance.
- The interest rate will not stay low forever. After the promotional period finishes, the interest rate charged on the balance transfer amount will revert to either the purchase or cash advance rates of interest.
- Balance transfers do not earn points. You won’t earn points on promotional offers like balance transfers. It’s a feature to help you manage your credit card.
Naughty and nice: Christmas credit card tips and traps
When interest-free doesn’t really mean interest-free. Putting aside interest-free promotions, a common credit card perk is the addition of up to 55 days interest-free on purchases. These interest-free days will only apply if you pay your credit card off in full every month. If you’re carrying a balance from month to month, you will be charged interest from the day you make a purchase.
The minimum repayment trap. If you find yourself with a credit card debt on the backend of Christmas, don’t fall into the trap of only making the minimum repayments. The above examples show how long it takes to pay a card off just paying the minimum. Depending on your balance it could be a matter of years or decades before you finally get the card paid off. And in some instances, you may never be able to pay the card off at all. Credit card statements will now show you how long it will take for you to clear your credit card debt if you’re only making the minimum repayment.
Protect your purchases.Although you’re going to pay more for it, some of the bells and whistles which are complimentary on a premium card will give you added protection this Christmas. There are a range of insurances offered with these credit cards but extended warranty and purchase protection insurance are the two most relevant for the Christmas season. Purchase protection insurance offers cover against theft, loss, or accidental damage that occurs within 90 days of the purchase date. Extended warranty does what the name suggests, it provides extended warranty on items purchased with your card. Refund protection is also a great credit card perk to have coming into Christmas. Not everybody gives the right gift, and you can rest a little easier knowing that if, ‘the glove don’t fit’, you can always take it back.
Fraud protection. Another benefit of using a credit card this Christmas is that you’re protected against fraud. Visa, MasterCard and American Express have zero liability policies which protect you against unauthorised charges made using your card. Most institutions also actively monitor their customer’s accounts 24/7 for suspicious charges, and during Christmas when you’re making a large amount of purchases and payments this protection can save you thousands.
If you plan to spend this Christmas, make sure you have an exit strategy for the new year. Credit cards are a great tool to manage your holiday spending — just don’t let the card get one over you this Christmas.Back to top