Manage Your Only Credit Card: Don’t Fall Into Debt, Get Out If You There !

I can think 2 main categories why one doesn’t want to have or use credit card. First one is due to some supernatural strange belief related to debt and the use of money. Really cannot do anything about this. The second category is the one that not really sure how to use or manage a credit card and don’t want got trap into debt trap. Well, I can help with this one.

The Ideal Case

First thing first, your credit card should have some interest free period (55 days or better would be nice). No matter how low the interest is, should your card provider doesn’t offer interest free period, close the account and get another one.

The idea of credit card is win-win. The customer can pay by credit card without having to have cash on hand but without additional surcharge, the retailer will have the opportunity to have more customer and more sales with credit card facility and the credit card company will get a decent cut from the proceed. Everybody happy.

But if there is no interest free period, then the customer is the one at lost. So no good. You credit card must have interest free period.

So the mechanism is: you shop throughout the month and at the end of the month a statement arrive and you just pay off the whole amount. No interest charged. The main convenient factors are: you don’t have to wait the cash (salary or otherwise), your cash is accumulating / earning interest for you in your saving account while waiting for the end of the month, you can also accumulate reward point (if there is one) and convenience shopping throughout internet and normal shop.

Fall into Debt, Get Out Soon

One day, due to forgetfulness or late salary payment from your employer or other reason, you then miss the due date to pay the whole amount mentioned on your statement. What to do now?

First of all, once you know you will not be able to pay the whole amount before the due date, pay the minimum amount (always mention in your statement, usually only around 2%-3% of the total or some minimum # whichever higher). Failed to pay the minimum, not only you will be slugged by late fee, but you will flag your account to be at risk for a default. A reminder later will come and then get nastier and nastier. So, just pay at least the minimum amount.

Once you only pay the minimum amount, the hefty interest rate will kick start. All the purchase that you made will have interest charge from the day of purchase and all new purchase will also carry a daily interest rate as soon as transacted.

Now that you have fallen into debt, then let’s try to get out from it. The first step is: do not stop using the credit card – but with special method below.

How to use credit card which is still in debt:

1. Use it as “prepaid card”. So, if you want to do grocery shopping of around $100, transfer $100 into your credit card account before the shopping.
2. Keep using it, do not stop. One of the common mistake if a credit card gone into a debt is to stop using it. Why? Because of the monthly minimum payment.

For example: You still owe $2000 and have to pay minimum of $80 per month. And your shopping is about $500 per month. Then if you complete stop using the credit card, you now have to pay $580 ($500 for the usual shopping with cash or other method and $80 for the minimum payment).

But, if you keep using it as describe in item (1), then that $100 per week is more than the minimum. So, at the end of the month, you only pay in total $500 (all your transfer into the account is counted toward the minimum payment, hence no extra $80 at the end). However, please note that your  interest will accrue accordingly (meaning you will have bigger balance due next month). But this is the price that you have to pay to give you time to recover from the fall.

In conclusion: keep transfering money into the credit card account as much as possible before using it but keep using it!. Try to back out from the debt the month after if possible.

Deeper Problem

Let see what happen if instead of going out from the debt, but you fall even deeper into the debt. Your balance is growing each month and getting near to the maximum credit limit each day. Here is some items that you could do:

1. Very important. You need to manage, whatever it takes, to pay that monthly minimum
2. It’s time to put a break on your expenses. (You do have budget, aren’t you ?) Make a drastic measure until you have comfortable space, only buy essential only, no eating out, no coffee, no daily newspaper, just tighten your belt as hard as possible
3. But still keep using it as per above. Stop using the credit card will cost you more in term of cash flow.
4. If you haven’t got one, draft a budget ! Talk to financial expert that want to help you without charge you for the fee. Or even just pay the expert to get you out from this potential problem.

Take control of your financial matter is  the key. Remember credit card interest is very very high. If you need to get some loan, there are many other loan that substantially cheaper than credit card debt.

Final Words

So… I hope you are not running into credit card debt problem. Try to get help from friends or professional before it’s too late. Don’t be shy and embarrassed. There must be someone that will help you.

On the other hand, if you have proven to yourself that you are good in managing your only credit card, Well done ! Remember that credit card is just a convenience tool in doing your day to day transaction. With this in mind, consider to have 2 credit cards with similar value. Only 2 (two) though… no more…!

Don’t leave home without it !

Your Homeloan Also Depends On Your Credit Card!

If you have (too) many credit card and you are thinking about getting a homeloan/mortgage, you need to read this article carefully. Yes, your credit card could actually the one determine whether you get approval for that home loan or not. Even you are not using that credit card at all! And you cannot really lie about it as it is documented in your credit history. So, what can we do about it ? Fortunately, not that difficult.

All about Loan Serviceability

When you apply for a home loan on a mortgage, it’s all about loan serviceability. A bank or other lender only want to know whether your income can pay for the loan – in other word whether your income can “service” the loan. This is what they call as “loan serviceability”.

This is how it works. Let say if you want to borrow $500,000 with 5% interest rate and you only take the “interest-only” loan.

1. Hence you need to pay the bank $2083 monthly.
2. The bank will now taken into consideration of the living cost. They have standard table for your local city/area based on number of children, age of the children,  your marital status, etc. For example: In Sydney, family with both parents working with 2 children below 5 years old will have more expensive living cost compare to Family with boths parent working but with 2 children between 5 and 10. Well the reason is because the cost of child care is more expensive than primary school cost.
   Let say for this example the living cost is deemed to be $2500 per month.
3. Then the bank will now look into other loan: car loan, personal loan, shop card, credit card, etc. They need to know how much you need to pay/service those loan monthly. Let say your monthly obligation is $500 monthly.
4. So, total from 3 items above will be:  $5083 monthly

This is where the notion “cash flow is the king” come into effect. From example above, your income (can be combined with your spouse/parter) HAVE TO BE more than $5083 monthly or $61k per annual after tax. Some lender will prefer to have also additional safety band and add 10% or more into the calculation. But basically this is how it works. Your income have to cover this monthly commitment.

But how about if you have quite some money sitting in the bank, say: $100,000 sitting on the bank? Nope, it wont help. The amount of money you have in the bank will not affect your serviceability above, because:

1. You can spend those money without any control from the bank/lender anyway
2. Without regular income, the amount of money sooner or later will be depleted.

(You can though, withdraw this amount and make it as additional deposit so instead of borrowing $500,000 you only borrow $400,000 which in turn will reduce your serviceability criteria)

Your Credit Card Reduces The Serviceability

Some people will always pay off the monthly expense on the credit card, but some other people won’t. So, the bank or lender will assume the worse. If you are committed with the new loan that they provide and you have some kind of financial difficulties, the chances are you will max-ed up your credit card and pay only the minimum amount. So, this is the calculation that will be used by the bank.

The typical minimum amount to pay each month from a credit card will be around 2%. So every $10,000 credit card debt you will need to pay at least $200  monthly. So, in example above, as you pay 5% for the home loan, then additional $200 monthly will be equal if you borrow additional $4,000. Therefore in other words, every $10,000 credit card limit will cost you $4000 home loan serviceability. Although this example is mathematically correct, we will never know the exact calculation that the lender do when it comes to reducing the serviceability. Therefore , I would recommend this rule of thumb:

Reduce the serviceability by the same amount of the credit c ard limit.

So, if you have a few credit card with total credit limit of $50,000 then if you think you can service $500,000 home loan, then with because of this credit card limit, then expect that the bank will only allow you to have $450,000 home loan.

Even if you don’t use the credit card at all, the lender will assume you will use all of the credit. This is quite unique to credit card as for other type or fixed loan, such as car loan, if you already pay off 75% of the loan, then your “obligation” will be only calculated as only the rest of the 25% of that loan.

Things that You Can Do

There are 2 easy things that you can do to help with this issue:

1. Close the credit card that you never use. Ask for the closing statement (the one which explicitly mention in words that you have closed your account)
2. Reduce the credit limit to your comfortable level (read this article about maximize your credit card benefit before decide). Make sure to ask the statement that explicitly mention that you have reduced your credit limit.

The statement about your account closing or limit decrease is quite important. Why? The bank/lender knows that you have a credit card from other bank (from your credit history check) and you will be most likely be asked to provide the latest statement, but a change of credit limit or closure is not that obvious (they cannot really check it) – hence you just provided it for your own benefit.

Also you can do: close all of your credit card except 2 (read Benefit of having 2 (two) Credit Cards of Similar Value) and consolidate all of your credit card debt into your new home-secured loan. Remember home loan is the cheapest loan around, so maybe it’s a good ide to have them all consolidated.

As final word, remember that getting a new home loan should not change your lifestyle dramatically (you won’t survive as home loan is long term commitment). Also credit card should be just your convenience tools. So you need to balance between these two:

• don’t push it to the highest home loan possible by increasing your serviceability by closing credit card account such that you have no convenience anymore -or-
• having too much credit limit in credit card so that your home loan serviceability is too small.

Well, you decide – no one else does. Good luck !

Credit Card For Online Transaction, Is it Safe?

With tremendous popularity of the internet, more and more people now make their first online transaction. And when talking about online transaction, the most convenience tools for such transaction is credit card. Using credit card give both seller and buyer immediate settlement, the money is immediately changing hand, no need to wait clearing time, no need to wait until the next business day, etc. But how about the security of the credit card? Is it safe to make online transaction with credit card ? Read more

Increase Your Credit Limit on Your Credit Card, or not?

From time to time, I always got a letter from my credit card issuer offering to increase the credit limit of my credit card. Some times, I take the offer and have my credit card get higher purchasing power, but most of the time that letter go strait to my shredder and then rubbish bin. So, when actually we need to increase the credit limit, and when we don’t? This is my guideline…

The Real Reason of Having a Credit Card

Before I proceed, please always be reminded that:

• the real reason we have credit card is for convenience, not for the debt, not for the “extra money”.
• we will pay off the credit card bill at every monthly due date
• If credit card purchase become debt (because you did not pay it off), it will be very expensive debt (why pay 20% interest if you can get at least half of it by applying personal loan for example ? )

As long as we are all remember all of the above, then let’s proceed.

Need an Increase, Yes !

So, when we need to increase the credit limit?

• 

  Wallet Purchasing Power

  If your credit limit is below 2 x of your monthly spending. Your credit card need to have double of your monthly spending. For example: if your monthly budget is $2000, then you need a credit card that has at least $4000 credit limit. This is mainly because while waiting the due date of the monthly statement, you will need to keep on living with your next month budget. For further detail read: 7 Ways to Maximize The Benefit of Credit Card
  So, when the initial credit limit below 2 x of your monthly spending, if the company offer an increase. Take it.

• To match your other credit card (To achieve 2 credit cards of similar value)
• You need to increase your emergency buffer, for example you have a new born, then $2000 credit limit will not be enough for monthly shopping and emergency access. Remember using credit card as emergency fund is not recommended. You always need to have emergency cash on your saving account. However, you can use the credit card as the access to it (pay with credit card first and the before due date you will pay it off with the actual emergency fund).
• You will be traveling overseas. When travel overseas, credit card use will enhanced your convenience for any transaction  since you don’t need to worry about exchanging cash and carrying a lot of cash around. So, your main transaction weapon while overseas will be your credit card. Extra credit limit might be handy as the exchange rate is changing all the time and unexpected expenses is more likely while you’re abroad.

The Risk Of having Higher Limit

• If your credit card is misused (by fraud or negligence) you might be liable of that amount. Hence having higher credit limit means higher amount that could be at risk.
• The temptation of impulse buying. Imagine if you have extra $3000 purchasing power on your pocket and you are looking at the item that you always want to buy for so long. The temptation so buy will be higher if you don’t have that extra purchasing power induced by your credit card increased limit. So, if you’re impulsive buyer, beware !
• When you are applying a mortgage/homeloan, the credit card limit will reduce your borrowing capacity. For example: if you have a total of $20,000 credit limit, then the bank will lend you $20k less.

Upgrade to Gold Card or Platinum Card?

After certain credit limit (vary from each company), the credit card issuer may no longer can offer you increase the credit limit without upgrading your card to the higher level. This is where you need to be extra thoughtful.

Upgrading to higher level (Silver to Gold, Gold to Platinum, etc) will usually involve additional annual fee. Sometimes very big different. For example: $59 per year for your ‘normal’ card and $199 annual fee for Gold card.

Of course, the company will try to sell you this upgrade by pointing you to some ‘additional benefit’ but this additional benefit usually just pseudo benefit that you will hardly use. For example: say with Gold card you are offered to have free travel insurance if you buy ticket with the card, but you hardly go overseas. Or maybe some discount if staying on certain hotel chain, but that hotel chain is too expensive anyway even with discount.

So, this illusion of “benefit” have to be clearly considered. Remember also to check with the real reason you want to increase the credit limit. If you don’t get added value, don’t bother with the upgrade.

Conclusion

Never automatically agree for any increase of credit limit or upgrade of your card. Always do your reasoning and consider the guidelines above. If still in doubt, it’s better NOT to increase.

Hope this helps.

Credit Card: Income Revenue For Issuer

I still remember when I first got my credit card. There is a feel of proud, importance and excitement that now I can just swipe the card to pay anything. And I also still remember how careful I was for filling the application form just as careful when I did the high school diploma test. I guess at any different level all of us will feel pretty much the same, we are all feel that the credit card issuer is the one taking control of your destiny of whether or not we will got the credit card. We are all maybe don’t realize that the one more eager for us to apply is the credit card issuer. They made a handsome money for all our credit card use. Read more

Benefit of having 2 (two) Credit Cards of Similar Value

Two credit card are considered of similar value if both of these credit cards have similar credit limit, similar interest rate, both have reward program  and have similar interest rate period. The credit card can be issued by different bank, or have different brand (i.e: Visa vs Mastercard) but as long as 4 factors above are similar, it still can be consider of the same value. So, why we will have a benefit if we can have 2 credit cards of similar value ?

Although you are already following the credit card best practices, sometimes – it will happen sooner or later, an event out of your control just happen. And as always, you are not to be upset about it (remember, it’s outside your control – nothing you can do about it) – especially since you have prepared yourself and have mitigate this risk. Read more

Credit Card Best Practices

If you have a credit card or considering have one, these are the summary of the best practices of owning a credit card:

1. You only need to have either Visa or MasterCard.
   Other brands (American Express, JCB, Diners Club, etc) are not widely accepted, have higher cost although give you exclusive sense.
2. Use credit card as transaction tool, not source of money
3. Always have credit card with ‘interest free period’
4. Follow a good ‘Reward Program / Loyalty Program’ and then avoid using cash for all the transaction and only use your credit card for any transaction as much as possible.
5. Aim to pay the membership fee with your reward program.
6. Pay off the monthly statement to avoid paying interest
7. Always remember:  credit card is DEBT. This temporary debt is perfectly okay since it’s interest free and you got benefit of reward program and you will pay it off every month anyway. But it’s a very expensive debt should you forget this.
8. Avoid using ‘advanced cash’ using credit card.
   Not only the interest rate is very high, but also usually you immediately forfeit the interest free period.
9. Check the monthly statement for any invalid transaction. Report and inquire immediately any suspicious entry for your own benefit.
   If you have internet banking access, check it on weekly timeframe
10. Keep the credit card receipt at least until it’s included in the statement.
11. The credit limit of your credit card need to cover at least 2 times your monthly expense.
12. Destroy the receipt before being put in the rubbish bin (A good shredder will do the job otherwise you need to do ‘manual destruction’)
13. If possible, have a saving account in the same bank of your credit card issuer.
    This will make the transaction between saving and credit card seamless. Internet Banking access betwen them would make it perfect !
14. If possible, own 2 credit cards of the same value for your maximum benefit
15. If you have 2 credit cards, make only 1 card actively used at any one time, don’t use the other one. But try to make even the usage maybe every half year.
16. Yes, you may consider a credit card as source of finance ONLY in the event of EMERGENCY.

7 Ways to Maximize The Benefit of Credit Card

Credit card is a great product and extremely useful for day-to-day life activity. Nowadays,  I would not be able to imagine a world without credit card. But yet, I can find some people even in the modern country like Australia or US that try to avoid credit card as if it’s an evil or illegal product. Yes, it’s true that credit card could trap you into debt, but the same thing as knife analogy. Knife could kill, but it’s very useful, then people need to learn how to use and respect knife rightfully not avoiding it. How people can learn how to use credit card properly and squeeze out all the benefit of a credit card ? By financial education… Let’s start with these 7 items Read more

Part 2 – Credit Card Balance Transfer: Your Own Calculation

This is the detail calculation comparing the money saved when you do balance transfer to other credit card discuss in this article. You might want to adjust the interest rate, the current debt and the minimum policy according to your real condition. Just change the data and press the yellow ‘update’ button on the top left (below). Then you can print out this sheet for your further action. Read more

Credit Card Balance Transfer: Use It For Your Great Benefit

If you have some credit card debt and have more than 1 credit card , you could possibly take a very good benefit of credit card balance transfer. But beware, the motivation behind this is that the credit card company wants your money for their profit and they make it a little bit tricky and if you are not careful, you will end up have more debt than before. Read more