Card stings to avoid

Effie Zahos explains how to cut your credit costs

Effie Zahos

GETTY IMAGES

IF YOU’RE TRYING TO PAY OFF YOUR credit card with extra payments, the worst thing you can do is make a lump sum payment just before your statement is due. This is because your minimum monthly repayment on the bill that’s about to arrive must still be paid regardless of how much you’ve just put in.

If your cash flow allows for the extra repayment along with the minimum monthly repayments, that’s fine. In fact, that’s great – an extra $150 a month plus your minimum monthly repayments on a $5000 debt can cut your interest bill from a whopping $18,000 to just $6000.

If money is tight and you’re in a debt reduction program to clear your credit card, putting all your cash into your card before your statement arrives, leaving you no money to handle the minimum monthly repayment, is a sure-fire way to get one of those annoying late payment calls along with an even more annoying late payment fee.

This is just one of the many wonders of credit cards. Here are four more to watch out for:

There’s a good time to shop and a not-so-good time. If you’re buying big-ticket items, buy them at the start of your statement cycle so you have more interest-free days to pay.

Just because you have a 55-day interest-free credit card doesn’t mean you have 55 days interest free on every purchase. The total comes 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.

There are cards with up to 62 days interest free – ideal for those big purchases as they give you just that little more time to pay.

It costs to not pay off an interest-free credit card by the due date. Interest will be charged from the purchase date during the previous statement period. You won’t have any interest-free days in the next statement period and, if you don’t repay in full at the next statement period, you will get charged interest on the previous statement period’s interest.

Confused? Let me put it another way. Let’s say you buy a TV on your interest-free card in early May. Your outstanding balance of $2000 is due on May 17. You don’t pay it off in full. Here’s what will happen:

• Your interest-free period in May is lost. You’ll pay a month’s worth of interest, calculated on the balance of your card each day. This charge will appear on your June statement.

• You lose your interest-free period in June, meaning you’ll pay interest on the whole of the June statement calculated on the daily balances.

• Your July statement will open with the interest from June, meaning you start being charged interest on interest.

Avoid an interest rate spiral by paying it back immediately. If you can’t, don’t add any new purchases until you can pay it off.

You can lose your interest-free period by just paying a bill. Bill payments from your credit card can be processed as either a purchase or a cash advance. It all depends on how the biller is set up with the BPAY billing service.

It’s more likely that a utility or telco provider won’t accept BPAY payments from your credit card, so it’s a good idea to check with your biller if they do. If they don’t accept credit card payments, your card issuer may allow you to make the payment from your credit card but as a cash advance.

So not only will you lose your interest-free period, paying a higher interest rate on the cash advance, you could be charged a cash advance fee too.

To find out whether a biller accepts credit card payments, visit BPAY, search for a biller, then look at the biller payment methods.

You can match up your statement date with your pay cycle. Being able to pay off your card in full by the end of your statement date can be a lot easier if your due date falls a couple of days after your pay day.

While most cardholders simply accept the due dates they are given, some card issuers will change your due dates to match your pay cycle. While legislation restricts them from moving the date more than 10 days at a time, some issuers such as NAB say they do work with cardholders to find a solution that works best for the cardholder.

It’s worth asking your card issuer if it can do the same for you.

Money’s editor has more than 19 years’ experience in the finance industry

Welcome!

Magazines Review offers you a broad range of popular American magazines online. Browse an extensive directory of magazines, covering most important aspects of your life. Find the most recent issues of your favourite magazine, or check out the oldest ones.

About content

All the articles are taken from the official magazine websites and other open web resources.

Please send your complains and suggestions through our feedback form. Thank you.