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March 03 newsletter

Welcome to the Shape of Money's step-by-step guide to the secrets to wealth.

This month we look at another secret to wealth: avoiding credit card debt.

Last month, we discussed the generic topic of avoiding debt. This month we revisit credit cards, in particular. Credit card debt is the easiest debt to incur, with the highest interest rate charges.

Achieving your financial goals means sticking to your plan and to your budget. Under those circumstances, the only use you are likely to have for credit cards is to use them for the cash flow benefits. That is, pay for your purchase using your credit card, and then pay for it in full (incurring no interest) a month later when the bill comes in.

If you don't pay your credit card bills in full, you won't achieve your financial goals and you're contributing to the huge profitability of credit card companies. They charge retailers up to 5% of your purchase, then charge you up to 20% interest (and it's compounding) of the outstanding debt. At the very least, the credit card companies must be achieving their financial goals!

Check out the credit card calculator and work out what your share is of the $440 million interest that New Zealanders hand over to credit card companies each year.

The marketing of credit cards has coincided with the increase in life style shopping: "I've worked hard all week, I can spend what I want on my Saturday shop". Unfortunately, these sorts of credit card spending statements won't help you achieve your financial goals.

To do that, you'll need to make credit cards work for you:

  • Immediately pay off any outstanding debt,
  • Have just a single card, and
  • Only use the card if you know that you'll have the cash to pay the monthly bill in full.

We can't reiterate enough the insidious nature of credit card debt. It's too easy to incur and too expensive and large to quickly remove. If you're serious about achieving your financial goals, one of the major life style changes you'll need to make is to rid yourself of the credit card chains.

In other news - check out what the media is covering on the topic of personal finance.