By far the most common financial trap is uncontrolled spending and impulse buying, particularly on credit cards. Usually, this is caused by the pressures of Christmas present shopping or the relaxed atmosphere of family holidays.
The financial damage done by the overuse use of credit cards can literally destroy a family’s financial stability for years to come as they battle to pay off very expensive debts that they could have avoided in the first place.
The good news is that credit cards can be used sensibly and even to your advantage. The key to this is to have a basic understanding of their terms and conditions (including interest rates). If you discipline yourself to use a credit card as a ‘convenience card’ and pay it all off in one lump sum within the specified time, you can literally borrow interest- free from your card provider. However, failure to pay off the card in one lump sum will usually lead to high levels of interest being charged on the card, sometimes in excess of 20%.
Better still, don’t use credit cards at all. Save a small amount each pay day for presents and holidays, and consider buying Christmas gifts at ‘Sale’ times throughout the year. And consider using a Debit Card, which limits your spending to the amount of money in your bank account. Now there’s a novel idea!
Another common financial trap is to sign up to a superficially attractive ‘interest free’ deal on furniture, electrical and white goods, and then fail to meet the repayment schedule that starts sometime in the new year. Depending on the small print (which most people don’t read), failure to make a repayment even by one day can immediately trigger interest rates at a similar level to those incurred on credit cards.
The best way to avoid these traps is to exercise financial discipline. This can be achieved by planning and budgeting your personal finances as early as possible. Work out exactly how much you can afford to spend on gifts and holidays, and ask yourself whether you’ll be able to repay the debt immediately; or will you be stuck with it for the next twelve months or more?
This strategy is not hard work, but most people don’t do it, and are forced to learn the hard way. It’s your choice!
For more information on budgeting and personal finances go to www.adfconsumer.gov.au and complete the Online Budget Planner.
Group Captain Robert M.C. Brown BEc FCA