Four Steps To A Debt Free Life
Australians pay billions of dollars in interest on their debt every day. Instead of letting the banks profit from our debt, all of us should be looking to make our debt burden as cheap as possible. Here are four steps to do that.
1. Set A Goal
Obviously we would all love to be out of debt and in the clear, sooner, rather than later. The first step towards a debt free life is the stated goal of destroying your debt.
There are a number of really simple things that can be done to achieve that goal such as budgeting your expenses and keeping a diary of your spending habits. Both of which will enable you to calculate where your money is going and how much if any, spare cash you can generate to attack your debt load, once your monthly living expenses have been met.
2. Move Your Debt To A Zero Percent Card
It is not the most revolutionary new advice, but moving your credit card debt on to another card and taking advantage of a zero per cent balance transfer deal is really one of the best ways of getting on top of your debt.
Once you get to the end of the zero per cent period, you should be ready to move whatever balance you did not manage to clear, to another zero per cent card, before the higher APR comes into effect.
3. Reduce Your Overdraft Interest Charges
Borrowing on an overdraft can be a difficult habit to break, especially when the finances are stretched. If you find yourself having to dip into an overdraft regularly, why not try and reduce your interest bill by switching to a current account that offers lower interest rates.
Many banks offer lower or ever zero per cent overdraft facilities for the first year, so long as you are making regular payments into your bank account. These offers are only introductory, so you should be aware that once the offer period is up, you will have to make regular interest payments, so you should make every effort to get back into the black as soon as possible.
4. Get Advice
Prior to the credit crunch, lenders seemed very happy to hand out credit as if it were sweets. It is therefore not that much of a surprise that some people carry a little more debt than they are comfortable with.
If you find that you are in over your head, there are a number of free debt counselling services, where you can get advice and you can do it for free.
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Five Steps For Financial Health
Recession can cause people to feel a lot of stress, as budgets tighten and people have to do more with less. Fortunately Australia seems to have put the worst behind it, and if you have lost a job or are on the hunt, then things certainly seem to be a lot brighter than a year ago.
If you are still feeling the pinch though, it can take its toll on your body, causing a variety of symptoms from body pain, sleeping difficulty and exhaustion. There is even a name for the condition, as silly as it sounds it’s called Recession Strain Injury, and there are millions of Australians who owe more than they can manage and are at risk of suffering from physical stress symptoms as a result of money problems.
If you find yourself suffering from financial tension, here are five tips that can help you get your financial position into a healthier condition.
1) Diagnose Your Problem
Perhaps the first thing you need to do is calm yourself, and once you have taken a deep breath, write down your after tax take home pay each month. Doing this is the first step in defining what your boundaries are for a financially healthy life.
You might find you can extend your earnings by claiming welfare payments if you are unemployed, renting a spare room out, or taking a part time job. If you know what you have written down is the end of it, then you will have to learn how to live within your boundaries.
2) Take Control Of Your Life
Once you have determined what your boundaries are, you need to start looking at where the money is going. You need to start looking at your monthly credit card and bank statements to find the exact source of your financial pain.
Writing down your daily expenditure is a useful way of tracking where your money is going, and whether you are making the best use of your dollar. I run a monthly spread sheet, which records everything I spend on my debit or credit cards, and every time I take money out from a machine. In the age of internet banking its easy to see where and when you spent your money, and the spreadsheet lets me know that perhaps I am exceeding my monthly limit, and where I can cut back on spending.
Sometimes I don’t want to know where and when I spent my money, because I know perhaps I have gone a little too far, but it’s something I have disciplined myself to do, It is important to know the news even when it’s not good.
3) Get Your Life In Order
After you have worked out what your monthly budget is, and where exactly your cash is going, the next thing you need to do is work out which expenses are the most important to you, as opposed to which of your creditors are giving you the most grief.
You need to focus on the most important payments; mortgage or rent is the absolute first. There isn’t anything more important than keeping a roof over your head. After that you should start looking at any court ordered payments, and unpaid tax, because legal action apart from being more than a pain, adds to your financial burden. Finally you should look at any unsecured debt you have such as credit card or your overdraft.
4) Maintain calm
Even if you find yourself in a financial pickle and under a mountain of debt, the courts tend to guarantee your right to a basic standard of living. The courts have no interest in seeing you being impoverished. This means the court will ensure you have enough cash to pay your mortgage and utility bills, as well as feed and clothe yourself and family.
5) Talk things over
Find someone you can talk too, obviously if you are married or in a relationship, the first person is your partner, it is important to have some support if you want to turn you debt situation around. Creditors are not necessarily rigid unhelpful organizations you would think they are. They have a vested interest in helping you pay off your bills, and have plenty of experience in soothing customers who find themselves overwhelmed.
If you are single, then talk to a friend or debt councillor, but make sure you find someone you can talk over the things that are causing you the financial stress you are under. It is important to understand and believe you are not alone.
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Four Ways To Save Big In 2010
So your new year’s resolution is to save big in 2010, and the age old adage of count your penny’s and the pounds will take care of themselves is as true today as when the proverb was first written. However that doesn’t mean to say you should focus entirely on making small savings, there are a number of ways you can really save big and add to your bank balance, making sure that next Christmas won’t be about belt tightening, but belt loosening.
Here are four ways to save big in 2010.
1. Cut The Middleman Out
Many people waste thousands of dollars in estate agent fees. The easiest way to save big this year is to cut the middleman out completely when you sell your home.
There are a ton of property websites that are already around and more coming online every day that allow you to list your property for no charge whatsoever. The sites aren’t just limited to people wanting to sell their homes, but renters can also make use of the service.
Google Property rolled out its service in Australia last year, and the search engine giant provides online property search services that allow everyone from agents to property owners alike list their property completely free, allowing potential buyers to see the exact location using Google Maps.
2. Look For Larger Retirement Income
If you haven’t started planning for retirement, and you are reading this piece, then it goes without saying that you probably know you need to start that nest egg as early as possible. Obviously in Australia it is mandatory to invest in superannuation (super) funds. But that doesn’t mean to say it ends there and it is always wise to look at additional products for the extra kicker after retirement.
When most people plan for retirement a lot of them opt for annuity products. An annuity is a guaranteed monthly income stream until death and some products are even linked to the inflation rate. What most people don’t realise is, that as much as 20 per cent can be saved just by shopping around for these products.
If you look around on the internet, there are a number of websites that enable consumers to compare different annuity products. So make sure you shop around..A 20 per cent savings can mean tens of thousands of Dollars that you gain over the lifetime of the product.
3. Get Upgrades
You can save more than $1000 just by shopping around for insurance upgrades.
According to the AAA, which reviews car insurance prices, consumers can save on average as much as $500 by shopping around instead of continuing the same policy with their current insurer.
The same can be done with almost all insurance policies you hold. Shopping around for home insurance can save hundreds of dollars. So when it comes time to renew, don’t treat the renewal as par for the course. Look around for the best deal on offer and lock in some terrific savings in 2010.
4. Cut The Petrol Bill
Going to the cheapest petrol station rather than the most convenient one, can save you as much a 7 cents per litre of petrol. If you save even half that amount per liter and drive 12,000 miles per year, that is a savings of over $500 a year, which is certainly nothing to be sniffed at.
Ten Tips If You Are Cash Strapped For Christmas
If it looks like you are going to be on tight budget this Christmas, no need to worry, here are 10 tips to help you make ends meet this Christmas.
If you think you are the only one wondering how to make ends meet this Christmas, don’t worry, you’re not, with just a few weeks left until the holidays, many of us are working on especially tight budgets this year.
The good news is that there are plenty of ways to save cash in the build up to the holidays, so here are ten tips to save money.
1.Design A Tight Budget
If you know it’s going to be a lean Christmas, then designing a budget that fits your finance is an important first step. You should take into account the cost of presents, food and decorations etc, and do your best to stick to it.
Draw up a frugal Christmas budget – factoring in the cost of food, presents, decorations etc – and try your best to stick to it. To get things started, sign up to the Manage on a small budget goal.
2. Look To Celebrate On The Cheap
If you intend to celebrate Christmas by dining out, then scope out a place that is inexpensive and fun to do it in first. Don’t make the mistake of deciding on somewhere without considering the cost first, and running the risk that your bill ends up tearing your budget to shreds.
3. Always Compare Prices
If you are doing Christmas shopping, then always look for the best price for the items you want, and using price comparison websites is an easy way to find the best deals out there.
4. Hunt For Vouchers
Before you go out and spend money online, you should hunt for voucher codes that can more often than not, knock down the cost of your shopping bill quite substantially.
5. Look For The Cheapest Travel Deals
If you plan on spending Christmas with family or friends, then there are a ton of travel deals online, and spending time finding good deals is a great way to save a little moolah.
6. Buy The Cheapest Petrol
If you are driving up to see your friends or family this holiday season, then check out comparison websites like motormouth.com.au to find the cheapest petrol prices in your area.
7. Look For Secondhand Bargains
Before forking over for brand new Christmas decorations or an new chairs to fit loved ones or friends who are joining you for a meal, you should see if you can hunt down a second hand Christmas bargain for a few dollars. It’s all out there, everything from clothes, furniture and other gift possibilities.
8. Find Inexpensive Recipes
If the catering bill over the holidays is breaking the bank, have a hunt around for inexpensive recipes. There are a ton of recipes out there that are both nutritious and yummy, using less expensive cuts of meat.
9. Make Your Own Presents
You don’t have to be Michelangelo to be able to make a thoughtful Christmas present for friends or family, and it’s a great way to spend some time, and can save you a ton of cash.
10. Make Your Loyalty Points Count
Lots of people spend all year saving up their supermarket loyalty card points, and then splurge during their annual Christmas shop. Loyalty points from supermarkets tend to be worth more if they are spent online rather than at the supermarket. So make them count and spend your loyalty points wisely.
How To Do Online Christmas Shopping Safely
This year over 27 million people worldwide will do their Christmas shopping over the internet according to PayPal. That is not that surprising, it’s easy, convenient, and there is no need to deal with crowds or carry heavy bags home. Just a few points and clicks and your done, and after a few days your Christmas presents will be there on your doorstep.
Almost everyone these days seems to do some part Christmas shopping online. Some do it for convenience, and others do it because if you look hard enough, there are some great bargains to be had.
If you do plan on doing some part of your Christmas shopping online, you should strive to stay safe, and knowing the retailers that you buy from are legitimate is critical, otherwise you may end up with nothing, or worse still find that fraudsters have stolen your credit card details.
Here’s how to stay safe online this Christmas.
Is The Site Trustable?
One of the best ways to find the best deal online is to use online comparison tools, like money-au.com.au, except obviously for the types of things you are looking to buy.
Some of these tools however may direct you to the best deal from a retailer you have never heard of. So how do you work out whether the site you are buying from is legit?
The best way is to use a directory like shopsafe.com.au. or other such directories. Directories like Shopsafe gives the site a once over before listing them in their directory, testing prices, delivery and site security.
If the site you want to buy from is not listed does not necessarily mean that it is dodgy, it means that the onus is on you to investigate. You should check whether the site lists an Australian phone number and contact address, and you should perhaps call the number first to check whether someone real actually answers.
Security
If you are looking for signs that a retail website is safe to shop at, the site should display the padlock symbol in your browser and instead of the site beginning with http, it should read https.
You should also make sure your cards are registered either with Verified by Visa or MasterCard SecureCode. If you have not already done so, you will find that it is easy and quick to do and offers an extra layer of security.
If you hold a Visa card or MasterCard you can sign up to either of those two services at your card issuers website or when you shop online with a merchant who participates in the scheme. The service means that when you shop online using your card, you will be required to enter a password first for your payment to be approved.
Just as important as making sure your cards are safe, it is critical to keep your PC safe. You should make sure your PC has anti-virus software. If there are multiple users of your computer, or you use a computer from an internet café, you should log off after every online shopping session. You should also maintain a note of the confirmation number of your order, even better would be to print a copy of the confirmation.
If you are purchasing presents that cost over $100 you should pay by credit card because it means you have extra protection from the Australian government, in the event the retailer goes bust.
Delivery and returns
There are a couple of things you need to make sure of when it comes to the delivery of your Christmas shopping.
The most important obviously is when the items you have ordered with actually be delivered. It won’t go down well with your kids, if on Christmas day you are making vague promises of presents that did not arrive on time.
The other thing you need to know is whether there is any extra charge for delivery, and you should also take the delivery charge into account when comparing the cost of items. Some sites charge fees for delivery, whilst others offer free delivery.
You should also make sure you understand and are comfortable with the refund policy of the merchant you intend to buy your gifts from.
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Australia’s Big Four Lenders On Acquisition Frenzy
The Big Four Australian banking groups have begun preparations for an acquisition spree after having built up substantial war chests, which will enable them to capture market share largely at the expense of smaller regional rivals.
Last week NAB announced a deal to acquire the mortgage aggregation and origination business of Challenger Financial, controlled by Australia’s richest man, James Packer.
That Challenger deal follows almost immediately after NAB announced it would acquire an 80 per cent stake in a wealth management joint venture with Goldman Sachs JBWere.
The joint venture transaction was also immediately preceded by NAB announcing it intended to acquire Aviva PLC’s Australian operations, which span life insurance and wealth management.
ANZ joined the feeding frenzy and embarked on its expansion strategy of deriving 20 per cent of its income from Asia, by announcing that it would acquire the retail and commercial banking units of troubled UK lender RBS, in up to six Asian countries for $687 million.
The total value of all the deals being considered amount to more than $2 billion, and once they complete, will have done so without having any major impact on the lenders capital levels.
The Big Four Australian lenders which are all highly rated, have built sizeable war chests of up to $4 billion each, giving them the ability to be predatory when an acquisition opportunity arises.
However two major questions remain, where the next opportunity will emerge, in which sector, and which bank will seize the opportunity first.
The Australian Competition and Consumer Commission (ACCC), through its Commissioner Graham Samuel, effectively ruled out any possibility of further consolidation within the Australian domestic banking landscape. Which means that it is most likely, that the major banking groups, will have to look at opportunities which arise internationally, at least in the short run, if they wish to add scale to their core banking businesses.
Commonwealth Bank of Australia (CBA) traditionally the most conservative of the major banking groups has maintained its stake in Chinese lender Bank of Hangzhou. Last week it announced that it would subscribe to an equity follow on offer from the Chinese lender to the region of $160 million to $165 million, which would maintain its stake at just under 20 per cent, the largest stake that can be held by a single foreign entity in a Chinese financial institution under Chinese foreign investment regulations.
The feeding frenzy has not been confined to the Big Four retail banks, Australian investment banking powerhouse Macquarie has a $4 billion war chest of its own, and last week spent about an eighth of that or $516 million, to acquire a US based asset manager Delaware Investments.
As equity markets continue to recover globally, analysts believe that the Big Four will want to add scale to their wealth management businesses.
After announcing the RBS transaction, ANZ chief Mike Smith indicated a keenness, to increase market share in wealth management, which he is says the lender is prevented from doing immediately, because of an exclusive joint venture with Dutch financial services giant ING.
The recent acquisitions by NAB in the wealth management space, clearly highlights its intention to become a major player in the space, whilst Westpac is grappling with integrating and upheaval at BT investment, despite the investment management firm being given a long leash.
The spending power of the major banking groups has not gone unnoticed, especially by those who clearly have businesses they wish to exit or sell.
James Packer’s Challenger was said to have aggressively pitched all four of the majors in its bid to obtain the best sale price, which was originally valued at $400 million.
The market view of excess capital being held by the banking majors is largely positive, but there are concerns, that if banks begin to hold tier-one capital beyond 9 per cent, then under-gearing may become an issue.
Currently the only acquisition target remaining in the Australian banking landscape are the banking operations of bancassurance group Suncorp-Metway, which has made public its intention of jettisoning its captive banking unit, which is mired in funding difficulties and large exposure to property finance, in favour of becoming a pure play insurer and wealth manager.
ANZ had expressed its desire to acquire the banking operations of the bancassurance group and indeed even tabled a bid at the height of the global crisis in credit markets, which was rejected as being too low in the wake of the Federal Government announcing its relief measures for financial institutions.
Recently however, the competition regulator Mr. Samuel has signalled his reluctance to approve any further banking consolidation involving a Big Four Banking Group as an acquirer, after suggesting he had been forced to approve the CBA, Bankwest merger.
Given Mr. Samuel’s view, there are increasing expectations that the large banks will either seek international targets or increase their holdings in international strategic partners.
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12 Basic Life Insurance Questions Part Two
We follow up with the second part of our two part series on 12 Basic Life Insurance Questions. For Part One See here
7. How Much Will The Insurance Cost?
Insurance costs depend on a number of factors that insurers use to determine the amount of risk associated with the insured.
- Age, sex and medical history
- Whether the person seeking cover is a smoker or not
- Type of policy and the amount coverage that is being sought
- The term or duration of the policy or cover.
A rough guide to the cost would be a level term insurance policy which provides $100,000 in cover would cost under $7 for a non smoking female 35 year old, and under $8 for a male of the same age who was also a non smoker.
Obtaining a quote on the cost of premiums from either an insurance broker or the insurer directly is an easy thing to do.
8. Are Joint Policies A Good Idea?
Joint policies do not provide the cost effectiveness that one would imagine and are usually only a little less cheaper than having two separate policies in place. Two separate policies provides double the cover for only a fractionally higher cost.
Under a joint policy, the insurer will only make one payout in the event of a single death for a single life.
9. What Would Stop A Policy From Paying Out?
Non disclosure is the most common reason for life insurance policies not paying out. When buying insurance and filling out the form, the individual should be careful to make sure that all the details provided are accurate; any inaccuracy may result in the whole policy being invalidated.
A lot of policies come with exclusions which the policy will not pay out on, so before buying cover the individual should make sure they read the terms and conditions and are aware of the exclusions
10. What Should Individuals Do If Circumstances Change?
When a person changes their circumstances or enters into different stages of their life, they should update their life insurance policies. Reasons for doing so or buying more can be anything from having a new child to buying a new home, but when circumstances change then life insurance needs to reflect the changed circumstance.
11. Should The Policy Be Written In Trust?
Writing life insurance policies in trust can help families avoid inheritance tax on the death of the insured family member. Most term insurance policies have forms attached which allow the insured individual to name the beneficiary, and thereby allows the insured’s family to avoid what can be quite a hefty tax on the individuals estate.
12. What Should Be Done If The Policy Is No Longer Required?
The simple answer is to cancel the policy. The individual should endeavor to make sure that the policy is really no longer required however.
12 Basic Life Insurance Questions Part One
Purchasing a life insurance policy can be confusing, there are a lot of products on offer and sometimes the options can make a buyer confused. Asking basic questions and finding out their answers can go a long way to clearing up the confusion. In this two part post we ask and provide general answers to the first six of twelve key questions, which should be answered before committing to a policy.
1. When Does One Need Life Insurance?
The short answer is if one has dependants, especially children, then they need life insurance. Another point in time where life insurance becomes critical is if one purchases a home using a mortgage and has a partner that is liable for the debt in the event of their death, then one should have some life insurance cover to mitigate the amount owed should the primary income or joint income earner pass away.
2. Where Or From Whom Is It Best To Buy The Cover From?
A lot of companies offer life insurance policies; the internet is a great tool for comparing different providers, the cost of the premium and the extent of the cover. For people who are confused about the type of insurance they should buy, since there are many types, they should look to an insurance broker, who will be able to clearly explain the different types and which would be best.
3. When Is It Best To Apply For Cover?
The earlier the better, the younger the person buying life cover, the cheaper the premium is, largely because the probability of death increases the older one gets. Insurance companies are acutely aware of this fact, so they charge more to insure people the older they get.
4. How Much Cover Does One need?
For those looking to ensure their partners are not saddled with debt such as mortgage’s they will need to purchase enough insurance cover to equal the outstanding debt. There may be other debts beyond mortgages that may also require cover. If the goal of the insurance cover is to act as a replacement for the income lost for the insured’s family, then some calculations will need to be made as to exactly how much cover will be needed. Most insurance company websites offer a calculator which allows you to obtain rough estimates of how much you need based on some basic inputs.
5. How Long Should One Be Covered For?
The answer to this depends on the what the cover is being used for. If it is to pay off a mortgage for example, then cover should be take for the duration of the loan, which typically lasts 25 years. If the cover is being obtained to protect dependants such as children, then cover should last until they have left home or completed their education.
6. What Kind Of Policy Is Best?
This again is dependent on what the individual is looking to have covered. For those who want to ensure their debt obligations such as mortgages are paid, a cost effective insurance policy would be a decreasing term insurance, one whose payout falls in line with the outstanding owed on a mortgage as it gets paid off. Again the most important thing governing what type of policy one should obtain is what exactly the individual is planning the cover should be used for.
For a more detailed discussion on the types of policy and what situations they should be used in see the article Five Different Types Of Life Insurance Policies And What They Mean For Individuals
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9 Tips For Protecting A Credit Card
Most borrowers are acutely aware of the need to protect their credit rating or score through the judicious use of credit. Borrowing what they can afford to pay, and ensuring that repayments are made on time.
Many consumers however fail to realize the importance of protecting the credit card itself. Here are nine tips for ensuring your credit card number does not fall into the wrong hands.
(1) Never hand over your card information over the phone, without first clarifying why you need to do so.
Card holders should always know exactly whom they are talking to and who is asking for the card information before giving out any details. If the call is unsolicited, never give any credit card information out as a rule.
(2) If the website is unsecured, it is unsafe to use a credit card.
Despite the convenience of shopping online, it is not completely 100 per cent safe. Consumers should be careful to check whether the website is secure and that it explicitly says transactions are safe. There is of course very little you can do if the website is not secure but says that it is. The easiest way to deal with that is to stick to making purchases from big reputable companies.
(3) Avoid placing credit card information in conspicuous places, like the back of an envelope or on a postcard.
That is fairly self explanatory advice, but it is surprising the number of people that don’t take basic precautions to protect their credit card information. If credit card information is required from a vendor, then the consumer should ensure that information is placed inside the envelope and the details are not discernable from the outside.
(4) Do not share personal or confidential information on social networking sites.
Social networks such as Facebook or Twitter have proliferated over the last five years and have become extremely popular. Many people like sharing information about themselves, but consumers should be careful about how much information and what kind of information they share, otherwise they become vulnerable to identity theft.
(5) Never Sign Blank Charge Slips
That is a recipe for disaster and leaves the consumer open to abuse. Card holders should always know exactly how much they are being charged for and should always verify the amount with a receipt.
(6) Check Monthly Statements Regularly
Borrowers should always look closely at their monthly statements and verify each charge made. If something is not right, then obviously that can be queried with the card issuer immediately.
(7) Destroy or cut up old cards through the account number.
When a card issuer provides a new card or the borrower closes an account. The card no longer required should be cut through the account number so it can no longer be identified.
(8) Always ensure credit card numbers and PIN are protected when using ATM’s or over the telephone.
One can never be to careful about the people that are around when personal data needs to be handed over. So consumers should ensure to be careful when using their cards over the phone or at the ATM.
(9) Try and minimize the number of credit cards that are carried.
This is basically to mitigate any potential misuse if the consumer loses their wallet. The less cards that are actually carried the less risk of misuse there is, and also ensures that the consumers has other cards available should there be a loss of the primary cards. If there is a loss, it is the consumers’ responsibility to report the loss.
Though most credit card companies and banks offer unauthorized protection, you are ultimately responsible for how your credit card is used. Your credit rating is important, so protect your credit the way you would protect a wallet full of cash.
Four Tips When Looking For Balance Transfer Deals
Balance transfer deals can be confusing at time. Done correctly though, they can really help alleviate the burden of debt for borrowers, and knock of thousands of dollars in interest payments. Here are four tips for the perfect balance transfer.
Tip 1: Look For The Longest Possible Deal
Generally speaking when transferring a credit card balance, the number one priority or the most important thing to look for is the card which offers the longest period interest free.
If an individual is carrying just $5000 in debt, the savings offered by differences in interest free period can be dramatic. A card with an interest free period of sixteen months, saves the borrower as much as $868.27 compared to a card with an interest free period of 5 months (assuming the borrower steadily pays $100 a month).
It therefore makes sense to look for the card or balance transfer deal with the longest interest free period.
Borrowers should be aware that transferring balances, between cards issued by the same lender is not possible.
Step 2: Avoid Paying Steep Fees
Fees are a part of life for people wishing to avail ordinary banking services in this day and age. Fees are fine for people who are not in debt, but start adding up quickly for individuals carrying debt.
When credit balances are transferred, usually the lender charges a fee as a percentage of the total balance transferred, which can be as low as 1 per cent or as high as 5 per cent depending on the card issuer.
It therefore make sense that once the borrower has assessed and obtained the longest possible interest free period, they should then start looking at the fees different lenders charge to undertake a balance transfer.
Step 3: Save Payments
If a borrower intends to pay off the majority of their credit card balance before the interest free period is over, then instead of making regular payments to their credit card balance, they can place the money in an interest bearing savings account, whilst the debt being carried is interest free.
The amount earned in interest may be marginal, especially with interest rates being so low, but an interest free period, is the same as free money (after fees have been deducted) and it makes sense for borrowers to put away their payments in an interest bearing account, and ensure the balance is paid off before the period is up. It is money for nothing.
Step 4: Avoid Negative Payment Hierarchy
We talk about negative payment hierarchy all the time, and when it comes to balance transfers and with good reason. Borrowers who don’t have a fair understanding of what it means could end up with a nasty shock, despite making the best effort to ease the burden of debt that they are under.
Simply put, a credit card will allocate any payments made on its balance towards the debt that costs the borrower the least amount in interest. That is to say, if a borrower engages in a balance transfer, any payment made on the card used to conduct the transfer will be used to pay of the existing debt, whilst any purchase made will continue to accrue high credit card rates of interest.
If a borrower makes a purchase after a balance transfer, they shouldn’t be fooled into believing that if they pay the whole amount of the purchase off, they will continue to pay no interest. The amount paid will simply be used to eliminate some of the balance transfer, whilst the purchase will continue to require interest servicing.
It is easy to fall into the trap, with some cards offering varying interest free periods for purchases and balance transfers. The former can be as long as three months, with purchases requiring interest payments beyond that, whilst the same card can offer balance transfers for as long as eighteen months in some cases.
The easiest way to avoid the problem is to use different credit cards for purchases and balance transfers. That way if a purchase is made, the borrower has a card specifically for the purpose, and can pay down the cost of the purchase whenever they desire.
The other alternative is to opt for cards with positive payment hierarchies. Unfortunately at the moment, there don’t seem to be that many around, but it is a growing trend, and within a few years, there will be a multitude of offers.