Ten tips on using your credit card wisely
They are small, often cheerfully coloured, and have a glossy sheen. Don't be lulled into a false sense of security. Their tiny size belies how much damage they can do if proper caution is not exercised.
Yep, we're talking credit cards which New Zealanders have taken to in a big way - almost three million of the innocuous-looking plastic rectangles lurk in wallets across the country.
According to World Cards Intelligence (WCI) figures, New Zealand credit cards are swiped at the till, fed into an ATM or keyed into a computer an average of 91 times each year. And each year, the tower of outstanding credit card debt grows steadily higher.
Used sensibly, credit cards can be excellent for cashflow - a handy addition to any financial toolbox. But used foolishly, they leech an alarming volume of cash straight out of your wallet and into the bankers' pockets.
And the holiday season is a particularly vulnerable time for us all.
Here are 10 tips to make your credit card work for you - not the other way around:
1. Pay your balance in full each month
This is the golden rule. The holy grail. The stuff of nightmares for financiers. If you pay off your balance within the interest-free period, you don't have to worry about interest rates. You get all the rewards and perks of a credit card with only an annual fee to pay.
But as soon as you start paying interest, it negates that benefit, says Federation of Family Budgeting Services chief executive Raewyn Fox.
''We advise people to make sure they know how to repay the things they book onto their credit card before they charge them.''
It all comes down to planning ahead, she says. But luckily for the banks most people either don't plan, or don't have the discipline to do that. Reserve Bank of New Zealand statistics show that of the total credit card debt owed at any one time - more than two thirds - over $3.5 billion is incurring interest.
The bankers aren't earning chickenfeed, either. Credit card interest rates are typically pretty steep.
2. Compare interest rates
''If you can't pay it in the interest free period, be aware of how much interest it's going to cost you,'' says Fox.
Not everyone can or wants to follow the golden rule. For those that don't, at least make the switch to a plain, no-frills card. All the big banks offer them, and the usual 13 per cent interest rate is a big saving from an average of 19.6 per cent charged to standard cards.
3. Keep cards to a minimum
American wallets are bulging at the seams with credit cards, not cash. The American love affair with plastic stacks up to an average of 7.7 cards for each card-carrying adult. We're not quite so infatuated here, but having two or three tucked away is fairly common.
Fox groans when asked if multiple credit cards are a good idea.
''It's really hard to keep a track of,'' she says. ''If you can't live within the credit limit of one credit card, then I would be a bit worried.''
You can't shuffle debt from card to card forever, and every time you do so, you get stung at a rate of usually 3, 6 or 9 per cent of the balance.
However, if you do have multiple cards, transferring all the debt to the one charging the lowest interest may well be worth the fee.
4. Don't get cash out if you can avoid it
Using a credit card to withdraw money is a costly way to get cash, Consumer NZ and Sorted.org.nz caution.
When making a regular purchase, you get 44 or 55 days without having to pay interest. But when you take out a cash advance, interest starts racking up from day one.
And there's an extra sting in the tail: interest rates for cash advances are typically about 2 per cent higher than for purchases.
WCI figures show that most of us appear to have learned this lesson - 93 per cent of transactions volume were made at the point of sale in 2010.
5. Watch out for sneaky credit extensions
Banks want you to borrow more, that's how they make money. So when a letter arrives in the mail complimenting you on your borrowing history and offering to extend your credit limit, don't be taken in.
Sorted.org.nz recommends basing your credit limit on what you can afford, not what you might spend. Don't let the bank bump it up beyond the amount you can pay back without incurring interest.
And be wary of the fact that if you don't reply or don't see the credit extension letter, most banks will forge on ahead without your permission.
6. Store cards are credit cards too
Don't kid yourself, these are nothing more than credit cards in cheap lipstick and fishnet stockings. Sure, some of them don't have annual fees, but they also tend to charge like a wounded bull.
For example, a Warehouse Red Card has a 22.75 per cent interest rate, and a Farmer's Card has a whopping 24.95 per cent rate. Ouch.
7. Rewards are for savvy spenders only
Funnily enough, cards with glamorous and attractive reward schemes also tend to have the highest annual fees and interest rates.
If you're paying back less than the full balance each month, no amount of airpoints or bonuses are going to negate higher fees.
But if you follow the golden rule, like Fox, then have at it: ''Personally, we use our reward scheme quite positively,'' she says. ''We're one of the people the bank hates!''
8. Pay more than the minimum repayment
A crippled snail crawling through an olympic swimming pool of treacle moves a lot faster than debt paid off by minimum monthly payments.
It's like running in place - barely keeping up with interest, taking forever to pay off the debt, and ending up paying far more than you would have.
It can be a pretty depressing situation, says Fox.
''We do see people that are paying the minimum monthly amount, and are then getting charged interest each month and virtually going nowhere with the repayments.
''The debt never goes down, or goes down very, very slowly.''
9. Avoid surcharges
Businesses used to wear the transaction cost charged by credit card companies, but now they're allowed to pass that on to consumers. This usually crops up with smaller fees, like taxi fares or parking. It's usually not much, but it all adds up.
It's best to carry cash or eftpos for the small stuff, and save the credit card for big ticket items.
10. Emergencies only
There's no doubt credit cards can be handy for navigating through temporary cashflow crises such as when you spend the last of your paycheque, then remember you didn't buy mum a Christmas present.
But sometimes, says Fox, emergencies can snowball into even bigger disasters.
''Credit cards are a good backstop for a crisis, but then you have to plan how you're going to pay it back, or it can really quickly get out of hand,'' she says.
And that's the key message - what really matters is having a plan to pay off any debt you rack up before the interest kicks in.
If you can do this, you can ignore the other nine tips. That's a pretty big 'if', though. The rest of us mere mortals are often somewhat lacking in the budgeting and self-discipline departments. And if that's the case, the 10 tips still stand.
Don't let your credit card control you. Even if you love it - especially if you love it - put your foot down, and show it who's boss.