Are credit cards evil? (and everything else you need to know about that shiny piece of plastic)

We Talk Cents Podcast

Want to know how credit cards work? Are the rewards programs worth it?  How easy it is to fall into debt? Want to know what to look out for and how to choose the right one? Learn something new about credit cards with Dan & Blaize.

The following is a transcript taken from episode 38 of the We Talk Cents podcast. The transcript is created by AI software so it might not be perfect - please forgive any imperfections or grammatical errors.

Blaize Pengilly  00:09

Personal Finance, budgeting, cash flow and investing don't have to be scary words. The We Talk Cents podcast is here to help you learn more about money and take control of your personal finances. We Talk Cents podcast is not a financial advisor. This podcast is made for entertainment and educational purposes only. All information shared is of a general nature and does not take into account your personal situation. You should consider whether the information is appropriate for your needs and where appropriate seek professional advice from a financial advisor. 

Dan Jovevski  00:45

For more information, please check out au/disclaimer. Hey, everyone, welcome to another instalment of the We Talk Cents podcasts. I'm Dan Jovevski, one of your hosts.

Blaize Pengilly  00:58

And I'm Blaize Pengilly. A millennial who asks Dan a lot of questions about money. The date is Monday, the 19th of July and we had a little bit of a break last week. Dan, how are you feeling? You feeling rejuvenated and ready for another bunch of awesome interviews and money topics to cover?

Dan Jovevski  01:15

I am Blaize I've been experimenting with a bunch of other nootropics which are an alternative to caffeine, which are all natural based extracts. Look, I think it's one of those short term fads that I'm probably gonna get over in the next two to three weeks. But look so far so good is working better than coffee for that morning pick up. So yeah, I'm feeling quite rejuvenated. How about yourself Blaize?

Blaize Pengilly  01:36

Look, I am feeling as I say every time I'm excited, because we have so much fun stuff planned and this next batch of podcast episodes, and I've never heard of whatever it is that you're trying - did you say tropics? Tr- Tr...

Dan Jovevski  01:51

Nootropics - It's, yeah, it's a it's a form, I think of science that goes into naturally extracting stimulants out of all sorts of stuff. Look, I don't know too much detail Blaize, I'll let you know next week if I'm still around. Well, you'll find it if I'm still around next week.

Blaize Pengilly  02:09

All right. Well, me and my regular black coffee will be sitting here waiting to see the results of that. Yeah, no, never heard of that. But yeah, I am looking forward to this next bunch of podcasts. And if you're sitting at home listening, thinking, I really wish they would cover off the benefits of having a piggy bank or how I don't know how check using check works. I mean that neither of those are really relevant these days. But if you're if you're sitting at home listening, going, I want to know more about a particular topic about money. Please hit us up in our DM, slide on in on Instagram, we are @getwemoney and we will happily take your suggestions and plan because we want to make a podcast where you're learning what you want to learn. And you're hearing about what you want to hear about. Now, Dan, it's been a little while since we've taken a look at the news headlines. What's been happening in the world around us in relation to money? 

Dan Jovevski  03:07

Blaize a few things. I think the one that is continuing trend is this buyer now pay later craze, which we would have thought and stopped by probably everything that you can, every every shop I go to these days, everything is buy now pay later right, and the additional entrance into the race now, Apple so Apple is partnering up with another bank out of the United States called Goldman Sachs. Yeah, pretty interesting that Apple's doing that they obviously got the Apple money, credit card out of the US they haven't launched that they're in Australia just yet. But it's interesting to see that they're also moving into the buy now pay later craze. The other one is PayPal. And PayPal is doing this more directly. We've heard about PayPal, the developing like a super app and also now going into the buy now pay later space which directly offering people instalments, and they've reduced the minimum buy now down to a $30 instalment, which I think is really interesting because they get into those lower purchase amounts, which is very similar to some of these other platforms. So that's pretty interesting. And of course, last but not least, one of Australia's biggest banks, the CBA or Commonwealth Bank, also. Yep. So look, there's no shortage of providers out there. Blaize What do you think?

Blaize Pengilly  04:20

Ah, so I feel like we talked about buy now pay later almost as often as we talk about cryptocurrency or you know, Papa Musk, because the news just does not stop rolling in about it. I mean, you've placed your predictions on buy now pay later and how it's going to and how we're going to be using it in the future. But far out. It's like buy now pay later is the cool new kid on the block that everyone wants to be and now everyone seems to be catching up you know, sort of started out with afterpay and I can't even I couldn't even list them all like from top the top of my head we've got Zip and Klarna. Now Apple, Pay Pal, Commonwealth Bank and I'm sure there's plenty of others that I can't even think of. So, if the space is heating up, I wonder how these new companies or new competitors will be enticing people to use their buy now pay later in particular. Especially given that the value proposition is that you pay interest free and you pay later, will people be offering lower fees for those that missed your payments? Will there be some sort of cashback offer, I just, I just wonder how competitive will keep it competitive and entice people to use their service over another when the value proposition is already kind of good, where you're just getting money, interest free, as long as you pay on time, one month in advance interest free

Dan Jovevski  05:46

That's it Blazie, and I think it all comes down to the customer relationship. So if you use all these platforms, if you're already customer, PayPal, but you haven't used Afterpay, you might trust PayPal more, because you've dealt with them over a longer period of time. And I think everybody's going to try find a home somewhere where they where they own the customer, and I think CBA, biggest bank in Australia, they obviously have a lot of customers, they interact with a very regular basis. If you're a CBA customer and you see it in the app, hey, all that friction has been removed, you don't have to worry about opening up and firing up your afterpay, zippay app. It's already there as you make your transaction. So I think the existing incumbents are don't have a buy now pay later solution. They're saying what's our biggest asset, our biggest asset is actually the attention of our customer base. Let's see if we can offer them service so they become more stickier, more attentive. So yeah, it's really fascinating and I too, Blaize, join you being lost with all the  names and inferences a company called Sezzle, there's Latitude Pay... Everywhere you look, there's somebody new that's entering that race.

Blaize Pengilly  06:43

Anyway, Dan enough about buy now pay later, for the moment... Can I pick your brains on that shiny bit of plastic that we keep in our wallet?

Dan Jovevski  06:52

Let's do it.

Blaize Pengilly  06:59

Dan, you know when you're 17, 18, and you are starting out in the world? Or maybe this is just my experience, but you're starting out in the world, and you start making your first adult decisions,

Dan Jovevski  07:10

I 100% do.

Blaize Pengilly  07:11

Well, I recall it when when I was thinking about what we'd chat about today, I sort of took a trip down memory lane back to when I was 18. And decided to go and set up my first bank account because I was sick of the bank that I was with. So I strayed from the one that my parents set up for me and went and set up a new one with I think Westpac. I remember going down to the city, lining up, getting the forms and then chatting to a banker, and them saying 'now would you like a credit card or a debit card?' And you might laugh at my innate naivety because I didn't really know what the difference was. And so I asked them, I said, What's the difference? And they said, well, debit cards, kind of like spending your own money and credit card is, you can spend a bit more money than you already have up to a certain limit. And I didn't really understand that. And I took a while to think about it. And then eventually I said, Oh, no, I'm gonna spend my own money, because that's all I can understand. Now, we've come a long way from inserting, swiping and typing our pin, which is great, because it's not very COVID safe anyway. But we're still using credit cards, albeit a lot less than we used to... In saying that I don't actually know much about them, if anything about them. So Dan, can I pick your brains on that shiny bit of plastic?

Dan Jovevski  08:26

Let's do it Blaizey. So in mid 2017, there were about 15.4 million personal credit card accounts in Australia, but that fell to about 12.9 million in October 2020. And that's a lowest since about mid 2008. And what this means on average is that about 88,000 credit cards were closed or canceled every month from January and October in 2020. This is a pretty big climb. And one thing that we have seen is that there has been some type of stabilization. So people aren't taking out more credit cards, but people that do have the credit cards may be holding on to them. And it's taken a really big shift. And there's a variety of different use cases for credit cards. And to put those into some big buckets, there are people that use a credit card and pay interest and leave a balance and the average balance in Australia is about $3,500on a credit card. And there's other people that use a credit card, but pay it off in full every single month without paying any interest. And I can put my hang up and say I've been in both those camps in my teens, early 20s. I was the person that left a balance on my credit card. But now in my later years on the person that pays off my credit card in full majority of the time and I think that credit card companies and banks know these types of individuals so as we go today and really explore credit cards, find out which one are you are you a person that leaves a balance or you a person that uses your credit card and pays it off in full every single time.

Blaize Pengilly  10:00

Look as someone, this is a little bit of a confession. So as someone who yesterday was looking at buying a pair of colored contacts for once off use for a costume party, that I will literally wear one time, I didn't have enough money in my account to buy them because you know, I'm doing sticking to my budget. I really think that, Dan, I would be in the group of people that carrying a balance board each month, because if I had access to that kind of money, I think I would absolutely just spend it straightaway on things that I brackets - Need - end brackets. Yes. So the bank knows these types of people. You mentioned about the credit cards being in decline. Why do you think use is declining? Is it because like we mentioned in the news, buy now pay later is increasing so dramatically? Or do you think there's other factors at play?

Dan Jovevski  10:52

Probably a few factors. I would say buy now pay later is probably one of the biggest sources, Blaize, because if you look at the decline of credit cards, and then you map over the course of buy now pay later, we're almost replacing credit card issuance with opening up more buy now pay later accounts. So people are transitioning to that form of credit. And what you can probably tell from the data is that the younger generation or cohort are using buy now pay later, as their only form of credit as opposed to opening a credit card. So you know, if you're someone in your mid 30s, like me, I've got a credit card because I know how one works, and I get points associated with that credit card and I know how to use it. For a young person, they might just say, I probably heard a lot of things around why credit cards are bad, why you shouldn't get one, the traps that you can fall into by having a credit card debt, whereas buy now pay later for some people, and the way they look at the product is that it's easily manageable, right, you know that you have four installments to pay, you can't buy more, it's tied to the individual purchase, as opposed to just having an open credit limit the allowing you to buy more stuff. And I think a lot of people know now that: Why get yourself into that trap to begin with - Let's not even apply to get approved for one, I'm only going to use a product that I can now manage. And I think that's how young people are voting with their time and wallets in terms of flocking to buy now pay later. The other phenomena which I think has also occurred, Blaize, is that I think people are just far more attentive to their state of their own finances. And looking at our the conversation about money become more, the conversation about money is becoming more liberal, more people are talking about it more people know what other people are doing. And therefore, you're much more aware about the issues about using credit cards than you were before. And again, that's probably the younger generation that is much more aware of this because they can access things like social media far more readily, and things like that. The other part, which is probably have a contribution here is that people can't travel anymore, right? Traditionally, you would take out a credit card, because you were going on a massive overseas trip, and you wanted to have that credit card as a safety net, I'm using air quotes here.

Blaize Pengilly  12:54

You wanna make it rain, you want to make it a great holiday.

Dan Jovevski  12:58

You're going to be going up or down the shopping aisles, going into those bars, doing whatever you whatever you please, with, you know, upwards of $5000 or $10,000 worth of the bank's money to spend on that trip. And a lot of people were using credit cards for that facility. Now that we can't travel, international arrivals and departures a lot lower. So therefore, people are spending less money. So there's probably a factor of actually spending less money. And I think one thing as well, which has also contributed to the closure of accounts is the stimulus checks. With more stimulus checks, people have celebrated debt pay off, because they've got that extra cash sitting around, they can go towards clearing our debts. And that's also, I think, part of the contribution of why people are turning away from credit cards. And just in general.

Blaize Pengilly  13:42

I forgot about the super withdrawal as well, I suppose if people were looking for cash or that safety net, you could have a lot of people took up that offer of being able to get money out of your super when the pandemic hit last year. So perhaps that could have an impact as well. Now, Dan this might be quite quite naive of me, but I'm sure you'll have a better description than the banker did when I was 17 or 18 years in the bank all those years ago. How does a credit card actually differ from a debit card.

Dan Jovevski  14:14

So the fundamental difference between a debit card and a credit card is with a credit card, you're using the bank's money to make purchases, so you're going into a deficit. So you owe the bank money. So if you buy a pair of sneakers that are worth $100, using the bank's money to make that purchase, and then you have to pay that off in a period of time, typically around 44 or 55 days. A debit card is just your own money. It's the money that you get from your source of employment or your government benefits or your rental property income that you can use in order to make purchases. Now the things that are very similar about debit cards and credit cards is that it operates on what the technical people call the same rails and when I say rails, all I'm talking about is MasterCard and Visa. So what do you see that sign in front of the convenience store at a shop that you enter, you have the ability to use the MasterCard and debit card rails to facilitate a payment. So it acts like a credit card with the biggest exception is using your own cash. And that's really what a debit card is, is it functions like a credit card, but you just use as your own money, if you don't have the money in your account, you can't make a purchase. Whereas a credit card, if you don't have the money, you can use the bank's money in order to make the purchase.

Blaize Pengilly  15:33

I like the sound of using the bank's money but the whole owing the back part, I don't like. I much prefer the Bank of mom and dad that are occasionally forgetful when I do owe them. Or the piece of paper it's written on is forgotten. Sorry, mom and dad, if you do, if you're listening to this, I will pay you back. Now, hearing the term credit, it really makes me cringe. Because like I said, I just feel like they're a bit evil - you hear all these stories about people in up to their eyeballs in credit card debt or unable to manage credit card debt or you hear you know, it's I still have this sort of negative connotation with it. But what if you want to avoid debt, but credit cards seem like a good option for earning points or bonuses, etc? 

Dan Jovevski  16:22

Well Blaize - are they evil? Or aren't they evil? Can you managet them? Or can't you manage them. And I think a great episode if people are interested to understand the psychology around making purchases and delayed gratification, then check out Episode 31, with Professor Billy Sung where we go into this topic in quite a bit of detail in touch with a topic called hyperbolic discounting, where we make short term decisions and put off long term consequences like paying the bank off. So in the case of a credit card and debit card, look, there is a lot of bad stuff. Let's be clear, right, one you can get yourself into a lot of debt very, very quickly. If you don't have the financial means to pay that debt off, that could potentially be crippling. So you hear a lot of people that will have credit card debt for years and years and years. And this is the classic case where people fall into debt cycles or debt traps where they can't seem to get out of this debt. And a credit card really is not designed to get you out of debt, right? It's designed for you to make your most minimal payments to pay off the interest. But if you want to pay off the principal, the largest part of the repayment, then you have to go and make those additional repayments. Now, most banks and financial institutions don't make it really clear in how you can pay that debt off over a period of time, what they tell you is the minimum repayment. So with all of this in mind, let me summarize, okay, what are the bad points, well, increasing your consumer debt levels and really buying things that you don't need. So we make short term decisions to consume the things that we feel like in the moment might be beneficial. But in the long run, just like Blaize's example, buying some different color eye lenses, we may not need!

Blaize Pengilly  18:04

It sounds ridiculous now, doesn't it? But if I had a credit card, um, if I had the money, I would have absolutely bought them for a once off purchase, anyway, buying things that don't need.

Dan Jovevski  18:14

And let's maybe focus on where the situation can go well. So what are some of the good things? Well, it could be beneficial to use a credit card if you want to accumulate points. So if you buy with a credit card, and you pay it off on time, you don't pay any interest, then you could be amassing a big number of points that could help you do other things, like potentially go on flights using the money that you already spend on your day to day purchases every single month. And that's actually a direct benefit to you, because you're effectively getting something as a benefit for using the product or service. But, mind you, having to use that product in a responsible way to begin with to make sure that you aren't paying interest and subsequently, you know, paying and subsidizing the points. And here's the secret with credit cards, right? This is how it works. Banks and financial institutions need people to pay interest. And those people that pay interest are the ones that are paying for the frequent flyer points to the people that pay their debt off. So if you're thinking about paying off your credit card, or you have a credit card with a lot of debt, what you're doing is you're subsidizing the other person that you could just say pulling out of their driveway with their suitcases who have just bought a trip on points. And that's how it works. Somebody has to subsidize the system in order for the other person to receive a benefit. And there's other ways that credit card companies can do that. They could do that by the fee mechanisms. Every time you swipe with a credit card you notice that cheeky little 1.5% fee that goes towards the benefits programs and operating the infrastructure to credit card companies.

Blaize Pengilly  19:56

So the lenders are really counting on that people being in those two groups - one, the reliable group that's, well not reliable, but the group that pay off every month, and then they really relying on some people to carry over that balance, pay the interest pay the fees to, teah, like you say, subsidize. So yeah, I know what camp I'd rather be in, and I know which camp I would actually be in. So desires and actions can be two different things. Just jumping in here, if you need a better picture of your finances, you want to track your multiple bank accounts or credit cards or see where you're spending your money, download the free WeMoney app. WeMoney is a free Smart Money app that helps you see and manage your money. Download the WeMoney app using the code word 'podcast', and you'll earn $5 on signup, when you connect an eligible bank account. Alrighty, back to the show! If getting a credit card is something that you want to do or need to do, what are the steps that you can take to make the right choice? Or what what should you really be assessing?

Dan Jovevski  21:02

Blaize there plenty of reasons why a credit card may be suitable for you. One, if you're a points person, or you go on trips, you know, domestically or internationally and you feel like they could accelerate your access to further travel, then maybe a credit card that has a points reward system might be suitable for you. Sometimes we'll get it in the case of an emergency, right? Of course, in situation, you would suggest building up a savings fund, where you could pay with your own dollars, that set aside that you don't touch. But if you're not at the degree of financial capability with that's a reality for you, maybe having access to an emergency credit card where you can access in times of need may be suitable. But again, I stress, right? Ask yourself, if you feel like you can't trust yourself, even one if that thought enters your mind that you cannot trust yourself, you cannot trust yourself, do not get a credit card.

Blaize Pengilly  21:55

I feel very seen right now.

Dan Jovevski  21:58

If you're a person that wants to use the bank's money, for interest for a period of up to 44 to 55 days, you could be in a place where you can leverage the bank's money to make all your purchases without paying any interest. This potentially for some people can be beneficial, we are getting into the weeds of this benefit. But there are some people that are really big points hackers and credit card hackers and are using the bank's money to their advantage. Not for all people, but it is a benefit. So step number two is work out how much you can afford to pay off each month. And this will help you find the most value valuable credit card for your own situation. So you've got to really consider if you are going to use a credit card to make purchases to save massive points, then are you going to be spending more than you earn? So is your credit card limit really big that can tempt you to potentially spend more than you earn or more than you can afford? So do consider that aspect, when you consider whether a credit card is right for you. Number three, figure out how much you can pay off each month. If you're able to pay it off in full, we get a credit card with more interest free days. So the typical example here is that most credit cards offer you interest rate period, about 44 days, maybe 155 days might be better for you and give you more flexibility, it means you won't pay any interest as long as you pay the balance off over a set number of days.

Blaize Pengilly  23:21

Okay, question when you say interest free days, but you're also saying paid off each month do th interest free days reset?

Dan Jovevski  23:30

Oh yes Blaizey this is a good question.

Blaize Pengilly  23:32

I don't, I don't really get it. So imagine I buy a nice pair of jeans for 100 bucks. And then I have a credit card that interest rate that 55 days does that mean that if I pay the $100 back to the bank within the 55 days, I pay no interest. But if I leave that to sit, I will pay interest for longer than 55 days is that? Have I got the gist of it?

Dan Jovevski  23:55

Blaize this is going to sound so confusing. So I'm going to encourage our listeners to stop and pause and have a think about this because it really requires almost a mathematics degree to understand. Right? 

Blaize Pengilly  24:08

I'm preparing myself. 

Dan Jovevski  24:10

So just imagine that you have 12 statement periods around the years every single month is a statement period. Right? So this is 1st of January to the 30th of January. So in this example, what the banks calculate as your statement period is the month where you can make purchases in that are interest free. So if you make a transaction on say the first of January, then your 55 days of your just free period starts then, right? If you make a purchase on the 30th of January, then you're 55 days interest start then, but then you still have your payment to pay on the first of February, right. So they're very tricky on how they calculate your interest free days based on your purchases. So this is very confusing because you're making transactions, you know various different timeframes throughout the month

Blaize Pengilly  25:02

All the time - you could never keep track

Dan Jovevski  25:03

Yeah, 100%, you can't keep track. And that's the thing is that to keep track of this stuff, most people get lost in uncovering when their actual interest rate, interest free days period started. And this is different, by the way, across credit card companies. So there's no one universal rule. Some have this policy, some have a different policy. So it's really clear to find out the definition of one; your statement period, if that's a monthly cycle, and number two; uncovered the T's and C's on when the interest free period starts, does it start at the start of the month? Does it start when you make a purchase, because you need to consider that. Otherwise, you may be either under guessing or over guessing where your obligation sits in terms of when you start paying interest? Which is the reason why, Blaize if you've understood what was just said, if it's so confusing, you can't understand that, then you probably should not be using a credit card.

Blaize Pengilly  25:58

Do you know what Dan, this sounds like I mean, I don't want to generalize here, but I will make a statement. Sounds like typical bank behavior! They offer you something, make it really confusing, so you can't really keep track of what you're doing. It's like what we covered in the episode about loyalty tax, where they make it really difficult to understand how much you're actually paying, make it difficult to figure out if you could be getting a better deal. In this case, it's difficult to understand when you're paying interest. So it's hard to keep track. And you will probably, if you're like me and did find that a bit confusing, be paying interest on things because you can't keep track of when you made the purchase.

Dan Jovevski  26:36

Yeah, I know it, look, look, you don't want to be really analyzing, you know, creating a list of all your purchases, finding out which ones have got interest free days, which ones don't I mean, it's just all too confusing. But the best policy here is to pay it off in full if you can, because it means you don't have to worry about all the shenanigans of figuring out interest rate day periods, etc. Because, quite frankly, no one's got time for that. It's just something that we shouldn't even be involved with, as a society, I believe, is trying to figure out this is a mess of interest free days.

Blaize Pengilly  27:07

Now Dan, you mentioned the three steps. So number one, how will you use the card? Number two, how much can you afford to pay off each month? And number three was if you can pay it off each month - I'm guessing number four is what happens if you can't pay off the full balance each month.

Dan Jovevski  27:23

Blaize, if you fall in a situation where it's unavoidable to obtain a credit card for whatever reason be that an emergency be the short term access to money that you currently don't have, then what you probably should be looking for is a card that has no frills, has a low interest rate and a flat monthly fee, or no monthly fee, or no annual fee. And there are a few credit cards that do meet those parameters. You may not be getting ones with all the points and all the other extras. But hey, what's probably more important to you is probably paying the least amount of interest on that credit card. So you don't have to worry about paying off the principal and the interest at a higher rate. And to give you an understanding of where credit card rates typically sit. You know, sometimes you get specials of like 8.99%. But a low rate credit card typically starts at about 9.99%. And a typical credit card is somewhere around 25% and sometimes up to 35%. So you've got to really consider here that you might be paying twice two and a half or three times more interest. If you take say a four rewards card, and you leave a balance Yes, you might be getting the benefits of the rewards, but you're going to be really paying for it remember, which camp are you in? Are you subsidizing the people getting the points or are you paying interest? And in those situations, if you are getting yourself into a situation where you do have to have a credit card balance, consider one that's probably a low rate that can help you not accumulate as much interest as say a high interest rate credit card.

Blaize Pengilly  28:46

That really reframes going shopping and seeing something on for 25% off - Imagine buying that with the credit card and then paying 25% interest on your credit card. You're still paying the full price, the money's just going to the bank instead of to the retailer. Now, my next question is about credit limits, I've had a lot of stories, a lot of horror stories I should say about people getting credit limits way larger than they can actually manage. How do you choose a credit limit that is right for your budget?

Dan Jovevski  29:15

Excellent question Blaize. So the first thing I would look at is find out what you can afford to manage. So if you are getting, say $1,000 credit card, what would be the interest typically on that credit card if you've left a balance? And could you, if for example, you had your own personal emergency where you couldn't say pay off the principal, but you needed to pay off the interest. Would that be appropriate? Now that number may vary from different people Will it be $1,000 $2,000 $3,000, does the limit meet your requirements? Sometimes for a lot of people $1,000 maybe a little bit too low. But if you are going on a trip, for example, and you consider that your emergency might be greater than $1,000. Maybe you don't want to have a low limit that doesn't cover off that if it's a general everyday expenses or emergencies, you know, maybe you should consider a limit that's more appropriate to what you can pay off.

Blaize Pengilly  30:04

How much do the limits vary? Is it, so you mentioned $1,000 - Can you get like 100k? A million, like, what's the biggest that you can go for a credit card?

Dan Jovevski  30:13

Well, it's not unheard of that you can have $100,000 credit card limit,Blaize. You have a special baller cards like Black or Sapphire editions, that basically give you the ability to be a high roller if you're a person that has money, you know, transacting your account very regularly, they're probably not typical, you know, they're probably situations of law, that you can sort of Google around and find out these, you know, super exclusive credit cards. But most people in Australia would have an average credit card limit of that $9,500. So that nine and a half k is representative of somebody earning or a family earning a typical income where they can support that credit card limit, and also minimum repayments that are associated with that limit.

Blaize Pengilly  30:56

If I had access to$9,500 I can't tell you how much useless stuff I would buy, I guess I know what I'm like - I would have I would have bought the color contacts and I would have bought them every color and shading shape, I think. What happens if you exceed your limit? Like can you exceed it? Or is it just game over?

Dan Jovevski  31:17

There are odd instances where you can exceed your limit. This is dependent on bank to bank. But bear in mind, if you do exceed your limit, you may be charged additional fees above and beyond your...

Blaize Pengilly  31:28

They love fees!

Dan Jovevski  31:29

They do. And so if you do go above your credit limit, look, the likelihood from most credit cards that we've observed is that there probably here is going to be a fee. Now some banks don't provide the ability to I guess, overdraw your credit limit. So that's going above and beyond the limit that you've been set, which basically means your credit card transaction will be declined.

Blaize Pengilly  31:49

Awesome. So it's pretty much like a debit card, except with the exception of credit cards that have an overdraw facility. What if you want to spend that extra money? Like can you bump your limit up? Can you make a cheeky call and you know, speak to Gary from the bank and say, Hey, mate, I need a little bit of a bigger limit here.

Dan Jovevski  32:08

You can Blaize. Banks typically make these offers to you. So you probably will be familiar, if you've gone into internet banking, and you do have a credit card, there may be an invitation sitting there waiting for you to do a credit card increase. Now this has come under scrutiny. This has come under a lot of scrutiny in the last royal banking commission where people were given a lot of increases to their credit cards or automated reviews without doing the appropriate checks and balances. So it's not as easy as it was, say five years ago to go and talk to your bank and apply for credit card increase. Most of the time, you have to supply the same formal documentation that you supplied in your original credit card application for the banks to consider whether or not they can provide you that increase. So more often than not, you're going to have to go through this process to determine whether or not you can get an increase. But it is possible. 

Blaize Pengilly  32:58


Dan Jovevski  32:59

And also as well, Blaize - it's not just on the way up, you can also elect to decrease your credit card limit as well. So it allows you to have further prediction if you feel like you can't trust yourself and you increase your credit card limit, you can actually decrease that credit card limit as well if you speak to your bank or or credit card provider.

Blaize Pengilly  33:15

Now does changing your credit limit affect your credit score at all?

Dan Jovevski  33:19

In some cases it might, Blaize. So if you apply for a credit card, increase banks, advisors, instutions might perform what's known as a hard credit inquiry where they'll go into your credit file and determine whether or not you've had any other additional credit events. So have you had a default on any other credit card repayments and make an assessment whether or not they should grant you that increase to your credit limit. So that's something that people should look out for and ask the bank before they apply for an increase; Hey, are you going to check my credit file for the purposes of me increasing my card? But more and more lenders we're seeing now are doing that activity where they are performing credit checks for any credit card increases.

Blaize Pengilly  33:56

I know we discussed credit scores in the very very first episode. So if you've got questions about credit scores, please go listen back to our very, very first episode, which seems like a lifetime ago. But I would like to, I'd like to ask - I've heard of people getting credit cards to improve their credit score. So they're more likely to be approved for something like a home loan. Is that a myth? Or does that actually work?

Dan Jovevski  34:21

Blaize, there is a grain of truth and there's also a lot of myths in this space. And you know, the short answer is is that consider everybody to be a unique individual to a bank. So when you apply to a bank or where you have data reported to your credit bureau, it's based on a lot of factors and sometimes trying to figure out all those factors and to make the decision whether or not a credit card can be an enhancement to your credit file or to tracking your credit file I think is almost impossible. So a credit bureau will look at your situation in terms of - you obtained a credit card, what age you are, what suburb that you live in. They try and model, as well, the other people that look like you. So they're trying to find patterns in other people's behavior, have a similar profile to you, and then apply that to your situation. So you might be young, very, very financially responsible. But what history has told the credit bureau is that people who are typically a lot younger, have lower credit scores, because they're uncertain about their potential risk profile. So I think it's a misnomer to state that getting a credit card may help you on your ability to obtain a high credit score. But the other thing that it might do is just ignore the credit score, one moment, a bank might be able to see your individual repayment history. And if they see a lot of those green dots on your payment history, they might consider you to be responsible with credit which might impact that specific credit application. So when you go to apply for your home loan, if you meet the minimum threshold requirements, if your credit score doesn't matter what the score is, but if they've seen a track record of you making repayments or you having the financial capability to do so they might consider that a positive. But again, I really want to stress every single situation is unique, and you can't rely on any information to make it suggestive whether or not you can increase your chances of getting, say a loan in the future a increase or decrease on your credit score. I know it's not the answer that probably people wanted, but it's one that I think is probably most accurate, given every single data point that we've seen in terms of impacted credit scores.

Blaize Pengilly  36:23

Now, let's talk about credit card debt. So I know you can use them well, especially if you pay them off in full each month. Like you mentioned, what if you're in debt? And you've decided, Okay, I've had enough? I want to get out of debt, I want to get rid of my credit card? What are the steps you can take to pay it off? Is it as simple as just paying it off? Or are there tricks or hacks or ways to make it easier?

Dan Jovevski  36:46

Blaize there are a few different strategies. One that is often discussed is the snowball method where basically you pay the last amount credit product first. So basically, if you've got three credit cards, one with $1,000 outstanding, one with three grand Well, with five grand, you want to pay off the one with one grand first, because that tells you there's a sense of accomplishment, right? You've completed one out of the three steps of the journey to get debt free

Blaize Pengilly  37:09

That momentum!

Dan Jovevski  37:10

Once you have that momentum that can further accelerate, not be another 2, not be another three. That positive inertia that you can get from the snowball method can help a lot of people. Alternatively, you can start with a card that has the highest interest rate first, this is financially better, but the snowball method can keep you more motivated. Sometimes it might feel like a bit of a dredge. And hey, there are people with, probably listening to the show, probably experience this more in the past, they might have like what you would consider scary amounts of debt like 20 or 30, grand or sometimes even 50 grand worth of debt. And if you've got like a personal loan that you've taken for like 30 grand, you might consider like chipping away that personal loan very scary, intimidating. So start with the lowest one, get it out of the way. And it frees up your headspace to think about, hey, I've only got one account left. And if it's a bigger one, you know, you can start chipping away at that slowly and slowly and slowly knowing that you've got you know two wins under your belt. You also may want to reduce your credit limit in the process to avoid the temptation to get out of debt. So if you come across, you know a tax return some additional money, bonuses or something like that you want to put on your credit card, how about you pay off the credit card, but then hey, call the bank or go inside your app if they have this facility and just reduce your credit limit. So you there's no way you could be tempted to potentially go back and increase that credit limit over time. Now there is another method that people can go down to which is considering a debt consolidation loan. A debt consolidation loan basically wraps up your credit cards or high interest rate products into one easy to measure payment. So if you were in a situation where you say got, like four or five debts, four or five different repayment dates, some credit cards with like above 20% interest rates, some say 10%, and it all becomes a little bit too much, then you can consider a debt consolidation loan that can wrap up all those credit cards into one easy to manage repayment. Again, this doesn't get rid of the problem entirely. But it could potentially save you money. If you're removing all those different repayments and stress that's associated with managing all those accounts. There is great government resources. So if anybody's listening, head over to the MoneySmart website or to Google Money Smart and head over there, have a look at all the awesome articles they have into the calculators that you can use to calculate how much credit card debt you've got and how you can repay that over time, including how much time it would take to pay off that credit card, depending on the number of payments that you can make. And once you know all those facts, that information, here's my credit card debt, here's what I can afford to pay off each and every single month, my interest and maybe some of the principal, and here's how long will take for me to completely pay off that credit card. So I think that's where people should go to if they want some really awesome information about using some interactive calculators to uncover how they can get out.

Blaize Pengilly  39:48

And if you find yourself in debt that you feel like you can't repay. I will plug the national debt helpline which we've mentioned a couple times before on the show. The national debt helpline is a free financial counseling service that can assist you with paying off money. So I haven't seen the credit card calculator or anything like that. But Dan I know that the national debt helpline is there to help. Dan, so if you have managed to pay it all off, or you're getting close to paying it off, when you're actually cancelling a card, what do you do is it as simple as taking the scissors to the piece of plastic that we've seen in almost every movie in the early 90s? Or is there other are there other steps that need to be taken.

Dan Jovevski  40:31

So once you believe that you pay off your credit card blows, what you want to be doing is making sure that balance is zero, there's no residual interest to be paid. A lot of people get very excited when they get to the zero balance day, but then they realize, oh, I've made that last purchase that last month, and that weird statement cycle, and I've got to pay that last bit of interest. So what you want to be doing is asking for a statement of closure from your bank. And this statement closure will tell you as of today, if I deposited money into my account, it will completely pay off my credit card. And then what you want to do is get your bank or financial institution to send you a visual communication, stating that account has been closed, there is nothing worse than thinking that you've closed your account when you just magically see it's available. And this does happen to people. And the reason why they find out is because they receive a brand new shiny piece of plastic in the mail when their expiry of their credit card is due. And they get a new card issued to them - They go hey I thought I closed this credit card down. But low and behold, you're actually you actually still have your credit card available and active.

Blaize Pengilly  41:29

Thank you so much for covering all of my credit card questions today. Dan, is there anything else that you need to keep in mind or should consider if you are looking at either getting or closing a credit card?

Dan Jovevski  41:41

Blaize the last little hack that we will leave the listeners with is - Look, all credit cards are different. All credit cards will have these funky terms, the best thing that you can do is to use what we think is a WeMoney hack. We've already heard about it before. I mentioned a lot of times, but you'll make on your keyboard: Mr Control and Mr. F - snap those two keys are the PDS find out things like introductory interest rate, purchases, penalties, fees, and uncover where they got those sneaky little fees, they're going to come bite you just at exactly the time that you don't want to. So have a look. Make sure you read everything up or get as many reviews as you can before embarking on the journey of applying.

Blaize Pengilly  41:43

Well, all in all Dan, credit cards still sound just as complicated and very easy to overspend on as they did before we before I picked your brains. But it is nice to know that people can manage them well and actually use them to their benefit. This is my last question to end on. What country doesn't accept cash or credit cards?

Dan Jovevski  42:47

Blaize I think I know the answer - I know I haven't seen it - because Blaize and I have show notes that we refer to  but I haven't seen this but I think I know the answer. It's gonna be North Korea.

Blaize Pengilly  42:54

Wrong. It's Czech Republic.

Dan Jovevski  42:56

Really? Oh my goodness.

Blaize Pengilly  43:01

Czech Republic, right? Pretty bad dad joke for you. I thought you'd appreciate it though. Thank you so much for tuning in to this episode of We Talk Cents,

Dan Jovevski  43:16

And we'll be back again next week with some more money news, more money topics that can help you understand your money better.

Blaize Pengilly  43:22

Don't forget, if you want to download the WeMoney app, it's completely free. You can get it from an app or Google Play Store, use the code word podcast and you'll get $5 on sign up. Also, don't forget, you can slide on into our DMs we're an Instagram at @getwemoney. I'll chuck a link in the show notes. If you've got any questions, feedback or topics you'd like us to cover up please slide on in - we love hearing from you. Until then we will catch you next time. Have a lovely week. See you later. 

Dan Jovevski  43:50

See ya 

Blaize Pengilly  43:50

Bye bye!


The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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