Plastic fantastic

Here are four smart ways you can use credit cards

STORY EFFIE ZAHOS

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CREDIT CARDS AREN’T NECESSARILY EVIL. IN the right hands, credit cards not only give you access to free credit – minus, of course any annual or reward program fees applicable – they can offer lucrative rewards, chargeback rights and, for some home owners, the ability to save tens of thousands of dollars off their home loan interest bill without making a cent in extra repayments. And a RateCity survey of more than 1000 respondents shows that 81% of cardholders pay off their outstanding balances in full during the interest-free period.

That’s the good news. The bad news is that 19% of credit card holders do carry over debt each month – although Reserve Bank (RBA) statistics show total credit card debt falling to $48.9 billion in October 2012, down by $147 million from the previous year. And credit cards are still ridiculously expensive.

Of the 200 credit cards on RateCity’s database, only 130 have lowered rates since November 2011, when the RBA began a series of cuts that reduced the cash rate by 1.75%. Some issuers have actually increased rates by up to 1%, says Michelle Hutchison, of RateCity.

“Credit cards can be useful tools, but you have to know when to use them and when enough is enough,” says financial adviser Julie Berry. She advises her clients to be aware that whatever their limit, whether they owe the whole amount or nothing at all, the limit(s) on their card(s) will be counted as a debt when applying for any other sort of finance and may affect their eligibility.

So depending on which side of the plastic fence you sit on, credit cards can be your financial undoing or they can provide you with flexible, interest-free money that comes with security and, if you’re lucky enough, a few perks in return for your loyalty.

The trade-off is that you need to repay them quickly, keep the limit low to avoid trouble and not get caught in a cycle of using one to pay another. So here are four ways to make credit cards work for you.

Free credit

It’s easy to forget what a credit card actually is – a lending facility with, in most cases, an interest-free period in which to make your purchases. Put simply, credit cards can be an interest-free loan. But to enjoy all the advantages and avoid the disadvantages you have to understand how they work.

Interest-free-period credit cards normally offer up to either 44 or 55 days interest free on purchases. Some, such as GE Money’s Coles MasterCard and the People’s Choice Credit Union Visa card offer up to 62 days interest free.

Of course, this doesn’t mean you have up to 62, 55 or 44 days interest free on every purchase you make. The total comes about through the monthly billing process (generally 30 days), plus the time between the end of your monthly billing period and the due date, which is generally 25 days if you have, say, a 55-day interest-free card. So if you make a purchase later in the monthly billing cycle, you’ll have fewer interest-free days.

“All the more reason to find a card with a maximum number of interest-free days and a low or, even better, nil annual card fee,” says Adam Beu, Canstar’s credit card specialist.

If you repay your balance in full by the due date, no interest will be charged to your card. To help you make your payments on time, ensure the statement period starts a couple of days later than your payday to allow for weekends and public holidays. Some banks, such as NAB, allow you to change your statement period to match your pay cycle. It’s worth asking your credit card issuer if it can do this. The biggest trap with these types of cards is not repaying the balance in full by the due date or using them for cash advances.

“There are no interest-free days for cash advances,” says Beu. “Some transactions such as BPAY may also be counted as a cash advance, so check your card’s terms and conditions to be sure.”

Things get a little murky when it comes to what happens if you don’t pay off your card in full during the interest-free period. “It all comes down to the terms and conditions of the card issuer,” says Beu. “It is safe to say, though, that you will lose your interest-free period until you repay your balance in full.”

Rewards

Reward credit cards allow you to earn points while you spend, with benefits such as free flights, cashbacks and gifts up for grabs.

“Reward cards aren’t for everybody but, for those who can repay them during the interest-free period, they are a great tool to manage your cash flow,” says Richard Wormald, Coles MasterCard general manager of financial services.

Interest rates on reward cards tend to be higher than on non-reward cards, as do annual fees, so the goal is to maximise the value from the points earned on purchases, relative to the fees of the card.

While this concept sounds simple, Jeremy Cabral, of creditcardfinder.com.au, says the world of credit card rewards can be confusing.

“Each program has its own rules and limitations, and there are plenty of things that can leave you scratching your head,” he says.

The best way to calculate the real value of reward points is by calculating the “net rewards value” based on your credit card spend, he says. The net rewards value is the total dollar value in rewards minus the annual fee and rewards program fee (interest isn’t included, as we assume you pay your balance in full).

When calculating the net rewards value, you need to determine the following:

• your estimated annual card spend;

• the number of points earned per $1 spent;

• how many points are required to redeem the reward you want;

• the annual fee (as a rule of thumb, you need to spend around $10,000 a year on a rewards card to offset an annual fee as low as $60);

• any rewards program membership fees.

As an example, I’ll use an annual spend of $20,000 on a credit card with no annual fee and an earn rate of one point per $1 spent where a $100 gift card requires 13,500 rewards points. Here your net return on the $20,000 spend (based on the gift card rate of return) would be $148. (For a $13,500 spend your return is $100; so for a $20,000 spend, you get a 20,000÷13,500 x $100 return).

Cabral says it gets a little more complicated when you involve dual credit card accounts, where you have to determine what proportion of your spend is on Amex, Visa or MasterCard, as they have different rewards point earn rates most of the time.

ANZ’s Rewards Platinum card and American Express’s David Jones Card took out gold in Money’s Best Reward Credit Card category. If you’re looking for a frequent flyer reward card, Amex’s Platinum Reserve Card won Best Frequent Flyer Credit Card for both domestic and international flights. You earn from 0.5 points to 3 points for each $1 spent, depending on where you use the card.

“The card is designed to reward customers where they most frequently shop,” says Trudie Newcomb, director, product and portfolio management, David Jones Alliance at Amex. “Card members accumulate points at a higher rate when they use their card in supermarkets, petrol stations and, of course, David Jones stores.”

Canstar’s Beu says you can top up your points by paying bills. “For example, paying your phone or electricity bill on the card could be earning you Qantas Frequent Flyer or Coles Flybuys points. Using your card to pay many of your normal household bills is a great way to achieve a higher points tally. Be aware, though, that there may be a [merchant] surcharge which could negate any gains.”

Wormald from Coles says surcharges are generally higher on Amex cards but, as Newcomb highlights, from March, new RBA regulations will give credit card schemes greater power to protect cardholders from excessive surcharging. “American Express opposes the practice of surcharging and we don’t think it should be permitted in any case,” she says.

According to Canstar’s five-star ratings, if you spend at least $24,000 a year, the cards that offer the best value for general rewards include the American Express David Jones card and the American Express Membership Rewards Platinum card. ANZ’s Platinum card, GE Money’s Coles MasterCard and Westpac’s Altitude Rewards Amex card are also on its five-star list. Of all the cards here, the Coles MasterCard has the lowest annual fee, at just $49.

Chargeback rights

Besides being convenient, credit cards offer security and, in some cases, value add-ons such as travel insurance, concierge services and purchase protection.

Credit card specialist Mike Ebstein, of MWE Consulting, says consumers should take advantage of chargeback rights on credit cards. “You don’t get this kind of protection when you pay cash,” he says.

Put simply, chargeback rights enable the cardholder to seek a refund if goods are not supplied or if they are not what you expected, particularly valuable for online shoppers.

There are other circumstances when you can request your bank or card company to get your money back from the shop where you bought the goods. It’s always best to refer to the card’s terms and conditions.

There are some circumstances when a chargeback may not be available, such as when you use your card for a BPAY transaction. And time limits can also apply. These can range from 75 to 120 days, depending on your card provider’s details.

As for value add-ons such as travel insurance, Ebstein says it is a case of having to read the fine print as not all may be as it seems. “Credit card insurance is a valuable feature, but you should make sure that you compare differing cards to get the most appropriate cover,” he says. “If you travel overseas, check the percentage loading on foreign currency transactions.”

Gold and platinum credit cards tend to offer free travel insurance as a value add-on, but higher annual fees generally apply. While there are cheaper premium cards, it should come down to the terms and conditions of the insurance. Even if the card has a hefty fee, you may still come out ahead if the cover is good.

When looking at travel insurance conditions, be aware that most cards require you to book a certain portion of the trip using the card. Some polices just cover the cardholder, and exclusions, excess fees and time periods of cover can also apply.

Interest savings

If you’re a home owner with, say, a $300,000 mortgage, an interest-free credit card could save you more than $5000 in interest off your home loan. Working on the principle that interest on your home loan is calculated on your daily balance – so the more you can put in on day one, the more you can save – the strategy of living off your credit card during the interest-free period and paying your entire salary into your home loan can make efficient use of your money. Here’s how:

On payday your entire salary goes into your mortgage offset or redraw facility and in the process immediately reduces the amount on which you are charged interest.

Of course, you’ll still need to pay ongoing living expenses. To cover these, you use a card that offers you the maximum amount of interest-free days – even better, one that gives you reward points too.

You can then use this card to cover your everyday expenses, while making sure you draw down on your home loan to pay off your credit card with an interest-free period.

“This strategy only works if you are disciplined with your money,” says Cabral, of creditcardfinder.com.au. “It does require management but it’s a great way to pay off your home loan faster.”

The biggest rule with this strategy is not to spend beyond your means on your credit card and to avoid paying interest charges. You must repay your credit card before the interest-free days end.

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