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Don't forget the Credit Card!
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Posted 11 September 2008 - 11:01 AM
Well, the RBA dropped interest rates last week and gave the mortgage belt a 0.25% reprieve. Hooray! It’s not going to shoot any lights out, but every bit helps. More please, Mr Stevens.
And while the RBA governor wasn’t too forthcoming about whether or not there would be any further interest rate cuts, he did make the comment that, barring any surprising events, rates were unlikely to go UP again in the near future, so that’s something.
But along with all the media stories on mortgage savings were a few other stories that were worth noting – namely the reluctance of the banks to pass on the interest rate cut to their credit card users. An article I read a few days ago estimated that the banks are reaping an additional $225,000 of profit per day by not passing on the cut – thanks for coming!
We all focus on our mortgage repayments, but credit card debt is a silent killer. It wrecks our budgets and costs us an amazing amount of money over time. Australians owe almost $44 billion on credit cards, and three quarters of that accrues interest, which is a huge amount of money that we give to the banks for no good reason. The average card balance is around $3,000.
So let’s look at an example. Let’s say your household owes $9,000 on credit. You and your partner both have a card, plus a joint one. Now, making minimum repayments at 18.5% (which is a fairly typical current interest rate), that debt would take you over 60 years to pay off – twice as long as a home loan term. And it would cost you around $29,000 in interest. Ouch! $29,000 in interest on a $9,000 debt!!
HOWEVER, by paying an extra $50 a month onto your credit cards (and remember, many of us have just saved $50 on our mortgages) you could have that debt paid out in a touch over 5 years and the total interest paid would be less than $5,000. So that extra $50 a month could save you decades of time and about $24,000 in interest. To me, that sounds like a great proposition.
There’s a fantastic credit card calculator, and it’s the one that I’ve used for this example, on the ASIC website, which is www.fido.asic.gov.au. Click onto their “calculators” section and select “credit card calculator”.
So what interest rate are you paying on your credit card? I’d wager a bet that many of you aren’t sure (and I’m not sure what my current rate is for that matter). If you want to research credit cards though, a good place to start is the Cannex website (www.cannex.com.au). They have a star rating for cards, and they also list selected cards according to their interest rate. At the moment the listed rates range from just under 1% to just over 20% - that is a MASSIVE difference!
Cannex also has some tips for picking credit cards on their site, as does Choice (www.choice.com.au). Well worth a read. So my recommendation this week is to spend a couple of hours researching what credit cards are out there that will suit your spending habits. Getting a reduction of 5% interest cost could potentially save your some serious dollars!
Have a great week! Oh, and tune in next week for some exciting Money Mummy news!
The author, Justine Davies, is a member of the Financial Planning Association. She is the author of HOW TO AFFORD A BABY, published in June 2007 by ABC Books: http://shop.abc.net.au/browse/product.asp?productid=164101
This information is correct at time of writing. It is general advice only and has not been tailored to your personal circumstances.
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