Investors naturally tend to focus on maximising returns. Yet no-one can be certain what returns will be in the future. The opposite is true when you focus on costs. There is a high level of certainty about the fees you will be charged whether it be investment products like managed funds or the plastic cards in your wallet.
Plastic cards are now an integral – some might say insidious – part of our everyday financial lives regardless of whether you are shopping at the supermarket, travelling overseas or paying regular household bills.
A recent experience highlighted just how dependent on small pieces of plastic we have become.
A text message from the bank’s fraud department certainly gets your attention and although nothing untoward had happened because of a suspected security breach with a merchant the credit card was frozen and needed to be replaced as a precaution.
Now going without a credit card for three or four days should hardly rate as a difficult challenge yet having to adjust back to having enough cash to pay for everyday stuff underlined how often the plastic comes out of the wallet.
It also prompted a proper review of all the bits of plastic in the wallet – something that was clearly overdue given the range and breadth of new cards and offers on the market.
Many astute consumers of course adopt the discipline of paying off their entire outstanding balance each month within the interest-free period – not merely the minimum required payment. A strategy that a leading financial planner once described to me as the single most valuable piece of advice he gave new clients.
One of the key learnings from behavioural finance studies is that while a level of choice is good too much choice can be overwhelming and actually result in inertia. There is increasing focus on the credit card market with the likelihood of a Senate inquiry into the credit card market looking more likely.
Certainly when you survey credit cards via one of the many rate comparison websites you see evidence of an overwhelming amount of choice. Interest rates range from just under 10% to more than 20% and that is before you get into all the various combinations of frequent shopper and travel reward offers.
Higher annual fees come with premium offers compared to basic cards with lower fees and at that point individual circumstances will decide what is the right deal for you.
It is a reality check to study your credit card statement and work out how many years it will take to repay your outstanding balance if only the minimum is paid each month. On an average credit card balance it will be more than a decade.
The Reserve Bank’s recently-released credit card statistics show that Australia’s 16 million credit card accounts had an average balance owing of $3,192 in April, down from $3,231 a year earlier.
And the average balance on credit cards accruing interest – meaning the card balances were not fully repaid at the end of a month – was $2,090, down from $2190 a year earlier.
An interesting trend involving purchasing by plastic cards involves the growth in the popularity of debit cards as opposed to credit cards. While a credit card uses borrowed money, a standard debit card draws down on a card-holders’ balance in their accounts.
In other words with a standard debit card, if you don’t have the money, you can’t make a purchase. However, some plastic cards operate as both debit and credit cards; it’s a point to understand and watch.
With dual-purpose cards, card-holders are offered the choice when of using the debit or credit facility when making a purchase. The obvious temptation is begin using credit once your own money is exhausted.
About 10 years ago, an almost equal number of card purchases were conducted each month on credit cards. Yet debit cards accounted for 65 per cent of the card transactions in 2014, reports the Australian Payments Clearing Association.
Yet interestingly, the amount spent each month is still higher on credit cards than on debit cards.
ASIC’s consumer website MoneySmart has some valuable tips about using credit and debit cards. (See How to use a credit card and Debit cards – using your own money.)
MoneySmart has a credit-card calculator, which should provide a wake-up call to anyone contemplating only paying back the monthly minimum required by the credit-card provider.
Despite the prevailing low-interest rate environment, credit-card interest rates remain around 20 per cent for most major bank cards so clearly carry over balances will see costs incurred significantly above any potential investment earnings.
It all comes back to things you can control. You cannot control market returns but you certainly can control costs like credit card charges.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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