"Just for emergencies..."
I was studying at uni and working casually when I applied for my very first credit card. My limit was very small – just $1500 (thank goodness!) – and the plan was that I would only use it as emergency money for my trip to Europe. Afterwards, I told myself, I'd pay it off and cut it up.
I clearly remember the day the card arrived in the mail; I signed the back of it and promised myself I'd be responsible. But four years later I was hooked – and still using my credit card.
I was continuously transferring money online between my everyday savings account and credit card. Because both accounts were linked, it was so easy to forget that the $1500 credit I had "available" was actually borrowed money. And that credit certainly did come in handy sometimes: when I was told out of the blue that I needed to pay a $1000 rental bond, off I went to the ATM to withdraw it as a cash advance.
While I'd always considered myself to be a savvy consumer, when it came to my credit card it turned out that was far from the case. I never understood the importance of paying a credit card off in full each month, let alone the interest rate or minimum monthly repayments.
When I started working at CHOICE, I owed almost the full balance of $1500.
Working out how much my credit card was costing me
I began covering financial issues for CHOICE, and discovered I was one of the 64% of Australian cardholders who didn't know their interest rate. I was paying minimum monthly repayments, thinking I wouldn't be charged interest on my debt, when it actually meant I was only avoiding late fees.
Using the ASIC Smart Money online tool, I calculated that if I continued paying the minimum monthly repayment amount on my statement, it would take a whopping 17 years and seven months to pay off. I'd also end up paying an extra $3236 in interest. And I was on the "low fee" card, with a 19.74% interest rate.
I felt pretty cheated. I'd always been a loyal Commonwealth banker – all the way back to primary school, through the Dollarmites savings program.
That's when I decided to act. I set about paying back my debt in bigger chunks, as fast as I could afford to, and before I knew it I was ready to cancel my card.
Ditching the card
At first I picked up the phone to cancel, but was told I had to make a trip to my local branch and do it in person. I was surprised again – the bank allows you to simply apply for a credit card online, yet when it comes to cancelling it's not so convenient.
The woman at the counter said it was a rarity to have someone walk into the bank completely debt free. She then asked why I was cancelling my card, and I said I no longer needed or wanted it. After some small talk, she then hinted that she loved her rewards card because she could shop with her points. In fact, she had $1000 to spend at Myer! Another staff member walked past and chimed in: "Oh yes, I love my rewards card! I saved up my points for five years and got a free ticket overseas."
Recognising their subtle selling tactics, I smiled and said "Oh, cool", attempting to project a polite lack of interest.
After signing a couple of documents and answering a few more questions, I was handed the phone to speak to another woman, who wanted to confirm my details and double check that I still wanted to cancel my card.
Again, I was asked my reasons for cancelling. Did I have anything in case of an emergency? Did I shop online, and did I want to keep it for this, because some people don't like to use their savings? I said I had a debit card and savings.
And once again, I had to confirm that I still wanted to cancel my credit card.
Despite their best efforts, I successfully cancelled, and left the bank that day feeling light as a feather.
But I have to admit, if I didn't know any better a "free" flight overseas and $1000 to spend at Myer just for using a credit card would sound very, very appealing.
Fortunately, Mozo has run the numbers on the average rewards card. To earn just $100 cash back, you'd have to spend an average of about $17,926. A "free" return flight from Sydney to London would require an average spend of $188,913 – not so much of a bargain. (For more on dodgy credit cards, check out our latest investigation into flight rewards cards.)
I learned some valuable lessons from my credit card journey. I won't ever be in a rush to get another one. If I do, I'll be making sure I shop around for the best deal (like a genuinely low-rate card) – my new goal is to do much less borrowing, and much more saving.
What I learned:
- Know your interest rate and cash advance rate.
- Even if you can't pay off the whole balance every month, don't be fooled by the "minimum repayment" – paying back just that amount will see you racking up piles of interest on the rest.
- Once you prioritise working on your debt, you'll be surprised how quickly the extra payments add up.