Tag Archives | credit card debt

Get Rid of Dumb Debt

Get Rid of Dumb Debt

The most common financial mistake people make is to borrow money at a high rate of interest in order to buy something they don’t really need or without considering whether they could borrow at a lower cost. This type of borrowing is what the Retirement Commission calls ‘dumb debt’ and they have launched a campaign aimed at encouraging people to get smarter with their debt. Examples of dumb debt are:

  • Paying only the minimum repayment on your credit card
  • Buying a large item such as a car without shopping around to find the best finance deal
  • Buying on hire purchase without checking all the additional charges such as set up costs and  insurance
  • Being tempted by interest-free offers on hire purchase without being able to pay off the debt in the interest-free period

There is a very useful debt calculator on the Retirement Commission’s website, www.sorted.org.nz, which helps you work out the total amount of interest you pay over the period of your loan. For example, if you make a purchase of $2,000 on a credit card with an interest rate of 20% and monthly repayments of $100, you will take just over two years to pay it off and you will pay $453 in interest. If, on the other hand, you save $100 per month at 3% interest, you will be able to save the $2,000 you need within just over 19 months.

The best way to avoid dumb debt is:

  • Never borrow money to buy things you don’t really need
  • Always shop around for the cheapest deal on finance, taking into account the interest rate and additional charges
  • Don’t borrow unless you know you can afford the repayments
  • Save the equivalent of your debt repayments before you make your purchase

 

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The Eight Worst Credit Card Mistakes

Credit Card Mistakes

Credit cards are one of the most useful yet also one of the most dangerous modern financial inventions. Use them wisely and you can make money from them. Use them unwisely and you can lose everything you have. The worst mistakes you can make with your credit card are:

 

  1. Paying only the minimum balance. You will lose the interest free period on new purchases and it will take a long time to repay your debt.
  2. Having too many cards. It is much harder to keep track of your total debt when you have multiple cards.
  3. Using cards for non-essentials. Getting into debt to buy luxury goods will set you back financially.
  4. Not getting the best deal. There are big differences between cards when it comes to interest rates and features. Choose the card that is right for you.
  5. Forgetting to pay or paying late. You will add to your interest bill and your credit rating may be affected.
  6. Having too high a credit limit. The higher your limit, the more you may be tempted to spend and the harder it will be to pay off your bill each month
  7. Being tempted with low interest offers. Look at the fine print before you accepting an offer to get a new card at a low interest rate.
  8. Refinancing without reducing your limit. Increasing your mortgage to repay your card will reduce your interest if you are maxed out, but only if you stop spending on your card.

To use your credit card to advantage, set the limit to a level that you can afford to pay off every month by direct debit. For emergencies, have a second card with a higher limit which you keep hidden in a safe place (not your wallet or purse!).

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