Credit cards

Credit cards

Credit cards can be a handy way of getting stuff, especially if your card has an interest-free period allowing you to pay the amount you owe before any interest kicks in. Credit cards can also be useful for snapping up goods on sale. However, if you can't afford to pay your credit card account in full before the interest starts, the bargain price you first paid can becomes more expensive once the interest starts piling up.

Interest on credit cards varies widely. At the lower end of the scale, you might be able to get a credit card with one month interest-free for around 15%, though there are some cards with rates over 29%. Some credit cards also charge an annual account fee and this can vary anywhere from $20 to $80. Many credit cards also charge extra fees if you are late with your repayments.

Interest costs on a credit card mount up quickly. You might find a fantastic deal on a stereo for $999 that you put on your credit card. But if you only made the minimum payment on a typical credit card account each month, you will still be paying for your stereo 3 to 4 years later. This is because the minimum monthly payment is often only 3% of the outstanding account balance, so the second month's payment would be around $30 (and include over $13 interest). At this rate of payment, the stereo would end up costing around $1400.

Debit cards

Instead of getting a credit card, another option is to get a debit card. Debit cards have the same security and many of the benefits as credit cards, particularly if they are linked up with a credit organisation, such as Visa. The difference is that debit cards draw directly from money in your account, so you can’t go into debt.  However, be aware of your account balance because overcharging can lead to fee penalties that can add up.

Store cards

Store cards work similarly in the way that credit cards do, though the interest rate for store cards is usually higher. The main problem with store cards is that they lock you into one or a few stores so you may not get as a good a price on stuff as you would if you had shopped around.

Applying for a credit card

Credit cards are offered by banks and are now also offered by many other different types of businesses including some mobile phone companies and gas companies! When you apply for a credit card, you will need to supply a lot of personal information including your wage, job situation and assets. The application form will also list the terms and conditions of the credit. This usually includes information on fees and charges, interest rates, your credit limit, how repayment will be calculated, and other information about your obligations under the credit contract. The process takes at least a couple of days.

Tips for avoiding credit card debt

• Work out your budget before using a credit card to make sure you can afford to repay your purchases and check whether the purchase will be a good deal after the cost of any interest is added into the price.
• Ask to have your maximum amount at a low level and refuse their offers to raise it! (e.g. $500 instead of $3000)
• Shop Around: Interest and fees vary widely on credit cards, and only some cards offer interest-free periods.
• Make sure you understand the terms of the credit card contract, especially any annual fees and fees that may be charged if you are late with payments. If you don't understand the contract get independent advice before you sign.
• Keep a close watch of any credit card spending as it happens (internet banking allows you to keep an eye on your balance free of charge!). Waiting for a statement to come could be too late to avoid a deep financial hole.
• Avoid withdrawing cash on your credit card (e.g. at an ATM or when purchasing), you are charged interest on this amount immediately.

Tips for managing credit card debt

• Pay off as much as you can to avoid paying interest.
• If your credit card debt is out of control, remove it from your wallet (or destroy it!) so you don't use it until you get some advice from a financial counsellor about what to do. 
• If you lose your job or there is some reason why you are having trouble making payments on your card, get advice from a financial counsellor or centrelink quickly (see More information below).

Alternatives to using a credit card

There are alternatives getting a credit card and avoiding the risk of ending up with a spiraling interest bill or a debt you can't pay.

Lay-by

Many stores will put goods aside for you while you pay them off. This is known as lay-by and it can be a great way of picking up stuff on sale. You will usually need to pay a deposit and then make minimum payments at regular intervals to pay off the goods by a certain date.

Lay-by is totally interest-free. It is against the law for a seller to charge extra money for agreeing to lay-by goods. If a lay-by agreement is cancelled because you breached the agreement, you will lose the amount of money which the agreement explains you will lose, and the seller must refund any extra amount you have paid.

Tips for using lay-by

• Work out your budget carefully to ensure you can make all the lay-by payments by the due dates.
• Check out the store's lay-by terms so you are fully aware of what will happen if you cancel the deal or miss any payments.
• Make sure the lay-by agreement is clear about what you have bought, how much the total cost will be and the payment arrangements and don't leave the store without a copy of the agreement, signed by you and the seller.
• If you break the agreement by missing a payment, talk to the store as quickly as possible to see whether they might be willing to let you continue with the lay-by.
• Watch out for dodgy retailers. If the seller goes out of business, you may have trouble getting your money back - so stick to sellers that you are confident will still be around when you finalise your lay-by.

What to do if you can’t repay your credit or store card debt?

First, talk to your bank or store and explain the situation. There’s a good chance they will be willing to give you more time to pay or help set up a revised payment schedule.

If this doesn't work, contact the Ministry of Fair Trading in your state (check the white pages). You may be eligible for credit relief. This is when the Ministry negotiates with the credit provider on your behalf. Credit relief is there to help people with temporary money difficulties. For example, those who lose their job, get sick or their partner suddenly has no income.

If the Ministry can't get your credit provider to negotiate, but still thinks you've got a good case, you can get your case heard by the Commercial Tribunal. The tribunal is independent, and has the power to order the credit provider to alter the terms of the loan. If your problems still aren't going to be solved easily, talking things over with a financial counsellor can be helpful. Most local councils have free financial services, and if you’re a student many TAFEs and universities have counsellors who can help. Check with your Student Union or student councillor. Centrelink also has a free and confidential financial information service.

Being in financial trouble can have other effects, such as making you stressed and putting strain on relationships. It’s important that you remember to look after yourself. Check out the factsheets on Relaxation and Coping with a stressful event for more information.

More information

Centrelink

www.centrelink.gov.au or call 13 23 00

Acknowledgements

This fact sheet is based on the Debt Suxs Info sheets written by Financial Counsellor Jenny Lawton and published by the Youth Affairs Council of Victoria. For more information see www.yacvic.org.au.