Credit cards are a convenient way of paying for goods and services online, or in person if you don’t have cash available. Used well, they are a way of keeping your money in your pocket for longer. Used poorly, they are a quick way of racking up a debt you’ll be paying off for years.
Credit card interest rates are often much higher than other forms of credit. Lenders used to only worry about your ability to make the minimum repayments on the debt because the longer you have a debt to them, the more interest and other fees they make from you.
From the 1st of January this year, when you apply for a new credit card, the lender must assess your ability to repay the credit limit within three years. It doesn’t matter whether you intend to use the full credit limit, they have to assume you could, because that is the amount of credit available to you.
For example, if you apply for a credit card with a limit of $5,000 at an interest rate of 18%, your lender must be satisfied that you can afford to make repayments of $180 a month, which is how much your repayments would be for you to repay the balance within three years. The minimum repayment will still only be $102 per month but they need to be sure you have the ability to make the higher repayment amount.
For the record, if you did have a $5,000 credit card balance at 18% and only made the minimum repayments, it would take you 33 years to pay off. By increasing your repayments you would not only have the debt repaid sooner, but you would save yourself over $10,000 in interest.
Credit limit increases – your credit card provider can no longer contact you offering to increase your credit limit, even if you have opted to receive these offers in the past. You can still ask to have your credit limit increased.
Backdated interest – if you have benefitted from an interest-free period and you still have a balance left at the end of the interest-free period, the credit provider can’t backdate interest on the balance still owing.
Reducing or cancelling credit – if you acquired your credit card on or after 1 January 2019, the card provider must allow you to reduce your credit limit or cancel your credit card online.
If you do decide to have a credit card, make sure you can repay the balance in full each month. This means keeping an eye on your spending and putting money aside to pay for your purchases at the end of the month.
If you have a credit card debt, use the credit card calculator at MoneySmart to see how quickly you could pay it off by increasing your repayments.
If you or someone you know are ever experiencing problems managing debt, call 1800 007 007 or visit the National Debt Helpline. If you just want to learn more about using your credit card wisely, see MoneySmart’s smart ways to use your credit card.
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