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Guest Post: Credit Cards - How to make them work for you

Today's Guest Post is written by Sean Hamilton. Maori Millionaire is honored to have Mr. Hamilton here again. You Can see his other posts here:


Understanding Banking


Money in; Money Out


Saving for wealth, not just a rainy day


Borrowing Money on Overdraft


Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.

 

Credit Cards: How to make them work for you:

By Sean Hamilton


At the end of February 2022, people in Aotearoa owed $5.8 billion on credit cards. The average interest rate on that amount is around 17% p.a. Credit cards were used to spend $3.3 billion dollars in purchases within the month of February alone. We’re a nation that loves using those little plastic cards. It makes sense to know how to use them properly and make the most of them as a tool for wealth, rather than a trap for debt.





Low rate, lite, standard, Airpoints, Hotpoints rewards, Cashback, True Rewards, low fees, American Express, advantage, Mastercard, and Visa. These are all different types of credit card products offered by banks or finance companies in Aotearoa. The choices are varied but can also be confusing. In this article, we’ll take a look at how the different types of credit cards work.


We can break down the various types of credit cards into two categories – no frills (low rate/low fee) and rewards cards.


No Frills credit cards typically offer lower interest rates, or lower fees (possibly both). You don’t usually get rewards for using these credit cards when making purchases. They can be a way to manage balances owed when taking advantage of the lower costs to have them from the issuer (the company or bank providing you the credit card account).


Rewards credit cards usually have a higher cost or fee, but can offer you incentives for spending whilst using them. When doing this, you can accumulate rewards, which can be things like cash, Airpoints, or other issuer specific rewards that are exchanged for goods.


Because credit cards involve an unstructured debt, they require people using them to be very careful. This means that they don’t have regular set repayments that are the same each month. Credit cards are one of the easiest borrowing tools from banks that can catch customers out. Because of the ease of access, it takes real dedication to avoid being caught in a debt trap.


Credit cards work by coupling a limit (the amount you can borrow up to, as agreed with the issuer) on a transactional type account. When you use any of the agreed limit, you will have to pay that amount back, with interest, until it is paid back in full. Sometimes there are interest free periods, which is a specific time allowed by the company that has lent you the money to pay it back, without being charged interest.


You use your Credit Card in a similar way as your debit card. Via Eftpos terminals in shops and online to pay for purchases. Because of the versatile and secure nature of credit cards, they can be a preferred way to buy things. Like everything though, there is always a cost for service. Credit cards have fees built into them. Also some businesses might put a surcharge on your purchase if you are using a credit card. These have to be declared (usually at the point of pay).


Annual fees on a credit card are an important consideration. To make the account worth your while, you need to see if the annual fee will be offset by any savings in interest or by the accumulation of rewards. This will always depend on how you use the credit card and which one you have, due to the different fees charged amongst the different issuers. There can also be fees for withdrawing money from a credit card, because this is borrowed money.


As credit cards are a form of debt, there are specific ways that letting customers borrow on them that is covered by law in Aotearoa. You must be 18 years or older and have a way to repay the money borrowed. You’ll need to be assessed to make sure the potential debt is affordable. When paying the money back, you must be able to make certain minimum repayments, which can depend on the credit limit agreed and how much is borrowed.


The best way to repay a credit card is to make the payment for what you have borrowed, as soon as possible after you’ve made the purchase, or before the due date for each month. This way you’ll avoid paying interest. In fact, the only cost for the credit card, if used in this manner, would be the annual card fee. This is how many astute credit card users maximise the benefits of a credit card when earning rewards.


Another way to benefit from a credit card can be by using a balance transfer. This is where existing debt is transferred onto a credit card, but at a special low rate, usually lower than the standard applicable interest rate on the card. Balance transfers are often a promotional tool for finance companies or banks to attract new customers for an agreed period of time, i.e. 12 months at an extra low rate. Customers can take advantage of these types of offers to their benefit as a means to keep the interest rate on the debt low while it is paid off.


If not used in the right way, credit cards can put people using them into an easy spiral of debt. You must stay on top of what you owe and not turn a blind eye to spending on a credit card. Take advantage of digital tools to manage how much you owe and only spend on a credit card when you know you can pay it off in a short space of time. If you find yourself in trouble, talk to the finance company or bank as soon as possible to make a plan to get on top of what’s owed. If in doubt about using a credit card, it’s best to avoid them altogether.


Not all debt is equal, so make sure you fully understand what you’re getting into and make it work the best it can for you. Credit cards and overdrafts are two examples of debt and borrowing we’ve looked at so far. Another are personal loans. These are structured debt, with set repayments and plans to pay them off. We’ll look more at these in the next article.


Nga mihi


Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.


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