Avoiding Trouble
There are a number of "money traps " which can be very easy to fall into when you are short of cash. The very fact that you are low on funds makes it even more important that you are aware of these traps.
• Credit Cards
• Bank Charges
• Fringe Credit providers
• Financial Identity Fraud
• Dealing With Debt
• Alternatives
Credit Cards
Credit cards can be a very convenient way of buying items when you don't have the 'ready cash'. However, if you don't control your expenditure and repayments they can come back to 'bite you'. The outstanding amount and the interest can build up quickly and lead to stress on your finances. Many people only pay the minimum amount each statement allowing their debts to drag over months resulting in enormous interest charges. The interest rate you pay on credit cards is higher than the rate you pay on most other loans, and your credit rating can be effected permanently through the misuse of a credit card.
What It All Costs
Banks offer credit cards with current interest rates up to 25%.
Initial Fees: All banks charge an annual fee for a credit card account, even if you already have one. There are some "Fee Free" accounts, however these don't have an interest free period.
Purchases: On a card with an "interest free period", interest does not generally accrue until a certain number days after the purchase is shown on a monthly statement. This is what is meant by "up to X days interest-free". You can only get X days interest free if you make a purchase immediately after a statement is issued. For a card with no interest free period, usually a "fee free" card, interest accumulates from the day an item is purchased. Minimum monthly payments vary for each card. They are usually a percentage of the balance or a set amount, whichever is larger.
A $1000 credit card debt being paid off via the minimum monthly repayment of $25.00 will take 153 months to clear the debt. In that time $1,115.41 in interest will be added.
Cash Advances
A cash advance from a credit card seems an easy solution if your rent is due. Wrong! There is usually no interest free period for cash advances (even if your card does have interest-free days for normal purchases). Interest may be charged from the day you take the cash advance.
Multiple credit cards
One credit card is hard to manage. Two or more credit cards can be a nightmare. The main problem with having several credit cards is the temptation to spend more than you can afford and slowly take each card up to its maximum limit. Some students fall into the trap of taking a cash advance from one credit card to meet payments on another. Not only are you then borrowing money at a very high interest rate, but you are also increasing your debt rather than paying it off and paying additional interest charges just to meet your existing interest charges. Joint Signatory Accounts should be avoided, since they bind you legally to repay the credit card account regardless of the condition of your relationship. It is not uncommon for a relationship to end abruptly resulting in one (very bitter) half repaying the whole credit card debt.
Interest Free Periods
Be wary of purchase agreements with interest-free periods. In some cases, at the end of the interest free period, if you don't pay your account in full, interest may be charged from the date on which credit was first provided. And, the interest rate might be 20% or more!
If you are going to use a credit card, learn to manage it properly! Don't buy what you can't afford. When considering credit cards, shop around. Don't just look at the interest rate. Consider all card conditions which influence the effective rate. Students paying off their credit card debts within the interest free period will benefit from a higher interest rate card with an interest free period. Those paying off debt over longer periods will often benefit from a card with a lower rate.
The Bottom Line: If you need to pay for your living expenses with a credit card then you probably can't afford one. Debts have to be repaid eventually. It is time to start budgeting or finding some other source of income such as part time work.
Manage Your Credit Card Responsibly and Save Money
top of pageBank Charges
Remember that most banks will charge a fee for each time you withdraw cash from an Automatic Teller Machine (ATM) which is not located at one of the branches of your own bank eg. withdrawing cash from a National ATM using a Commonwealth Bank Card. Some of the banks don't charge transaction fees if you are a full time student (such as the Commonwealth Bank). To take advantage of this, you will need to show them a copy of your current enrolment record each year you are studying. Internet banking can also save you fees although there may still be a cost attached.
How much are you paying in fees?
Fringe Credit providers
Exercise caution when considering credit from pawnbrokers, Fringe and Same-Day lenders.
Financial Identity Fraud
Financial Identity Theft can occur when your personal and financial details are obtained and misused by another person. The Australian Bankers Association provides details on how to avoid misuse of your credit card and personal details.
Dealing with debt
Contact your bank: If you can no longer afford the repayments on a loan or credit card, the first thing you should do is contact your bank. Once your bank is aware of the problem, they may be able to negotiate a different repayment schedule to help you make your payments – but make sure you alert them to the problem early.
Financial counsellors: If you can’t resolve your debt situation, a financial counsellor may be able to help you. Financial counsellors work with you to develop strategies to manage your money and work out repayment plans.
Don’t ignore the problem: Never ignore a problem debt – it won’t go away on its own. The sooner you deal with the problem, the sooner you will get on top of the situation and work your way towards a more manageable financial situation.
Code of Banking Practice: The Australian Bankers’ Association (ABA) operates under a Code of Banking Practice which is the banking industry’s customer charter on best practice standards. If your bank has adopted the Code, there is a commitment by your bank, that with your agreement, the bank will try and help you overcome your financial difficulties with your bank loan.
Check the Commonwealth Financial Counselling Program (CFCP) website for more information.
Alternatives
Lay-By
Don't forget good old lay-by. This is not really a form of credit, it is an interest free way to secure a purchase. Lay-by is especially useful where goods are on sale but you don't have the ready cash at the time to purchase them.
Negotiate payment of bills
Gas, electricity, water and phone providers may be willing to give you more time, or to allow you to pay off your debt in instalments. If you have trouble with meeting energy bills, contact your suppliers directly. Your landlord may be willing to accept instalments if your rent is overdue. We recommend that this agreement be done in writing. You may wish to contact the Housing Service for further advice.
Cut your credit card into pieces
If, after repayment, you destroy the card and close the account, that is the end of credit card debt and high interest payments. If you still want the convenience of paying bills over the telephone, you can organise Bpay or a Debit card with your bank. This way you will only be using your savings, not borrowing money and paying interest.