tax rates for minors

Understanding and minimising tax rates for minors

30 Sep, 2016

It’s only natural that you would want to give your children a good start in life financially, so it’s important to know about tax rates for minors, which apply to money saved in their name and to anything they themselves earn.

 

Tax on income earned by children

If your child earns income through their efforts, for example with an after-school job, it’s classed as ‘excepted income’ and is taxed at general adult tax rates. Anything they earn up to a certain threshold (currently $18,200) will, therefore, be tax-free.

It’s a different story, however, for income received from investments in your child’s name. This is known as ‘eligible income’, and the following tax rates for minors apply:

 

Tax on eligible income for minors (2015–16)

Taxable income Tax on this income
$0–$416 Nil
$416–$1307 66c for each $1 over $416
$1307 and over 45% of total income

Source: © Australian Taxation Office for the Commonwealth of Australia.

 

You can see that children are in fact charged the highest marginal tax rate if their investments return over $416 a year. This may seem pretty unfair, but this system is in place to deter adults from transferring investments to their children’s names for tax avoidance reasons.

You should therefore carefully weigh up the pros and cons of opening an investment in your child’s name, especially if the annual returns are likely to exceed the tax-free threshold while your child is still under 18.

If your child receives a combination of excepted income and eligible income, ordinary tax rates will apply to the excepted income while any eligible income will be subject to the higher tax rates for minors.

Let’s take the example of 17-year-old Peter, who works a part-time job and also has some money saved from gifts he’s received over the years. Last year he earned $9430 at work and his savings generated interest of $716. The $9430 is classed as excepted income and falls within the tax-free earnings threshold of $18,200. However, the interest on his savings will be taxed at the special higher rates since it’s classed as eligible income.

 

Registering your child for tax purposes

You can request a tax file number (TFN) from the ATO for your child from birth. If you don’t supply your child’s bank or share registry with a TFN then 47% tax will be withheld on interest earnings over a threshold of $420, as well as on all unfranked dividends.

Children with assessable income below $416 do not need to lodge a tax return, but if they have had money withheld from an employer or investment body, they will need to complete a tax return in order to get some or all of the money returned to them.

 

Tax deductibles for children

If your child is employed while going to university or TAFE then they may be able to claim a deduction for expenses where there is a clear link to their course. It may be possible to claim any of the following expenses:

  • depreciation of assets (such as computers, desks and bookshelves) required for study
  • journals and periodicals
  • photocopying and printing costs
  • stationery
  • student union fees
  • textbooks
  • travel from work to place of study

Any tuition fees payable under HELP or any repayments of outstanding HELP debts would not be eligible for a tax deduction.

 

Determining ownership of a child’s funds

Money received from a child’s investment must be declared by the person who rightfully owns and controls the investment. This is the case even if your child’s name is on the account and you only use the money to benefit them.

Imagine Alison deposits $6,000 into an account for her son, who is 4. Alison is signatory to the account and regularly makes extra deposits, as well as occasional withdrawals to cover her son’s preschool expenses. Since Alison is in complete control of the account, the ATO would determine that the money belongs to her, not her son, and it should be declared on her tax return.

In another example, Simon opens a bank account for his daughter, a little accountant in the making, who decides to save all her money from Christmas and birthday presents, pocket money, and odd jobs around the house. His daughter is the only person to use the money in that account, so any interest earned would belong to her.

 

Summary of tax rates for minors:

  • Income earned by minors through work is classed as ‘excepted income’ and taxed at the general adult rates
  • Passive income, for example through investments, is taxed at a higher marginal rate for children
  • If you don’t supply a TFN to your child’s bank or investment provider, they will withhold 47% tax on interest earnings over $420 and your child will have to file a tax return in order to reclaim the tax
  • Children who work while studying may be able to claim a tax deduction on certain items linked to their studies
  • If funds held in a child’s name are rightfully owned and controlled by an adult, the funds belong to the adult for tax purposes

 

income splitting

Minimising tax by income splitting for couples

28 Sep, 2016

You work hard for your money, so why would you pay more to the taxman than absolutely necessary? Many couples stand to save money on tax by using the income splitting strategy. This is a perfectly legitimate way to plan your income attribution according to the Australian marginal tax rate system.

 

How the Australian tax system works for individuals

 

Tax rates for individuals excluding levies (2013–14)

Taxable income                           Tax on this income

0–$18 200                                  Nil

$18 201–$37 000                        19c for each $1 over $18 200

$37 001–$80 000                        $3572 plus 32.5c for each $1 over $37 000

$80 001–$180 000                       $17 547 plus 37c for each $1 over $80 000

$180 001 and over                       $54 547 plus 45c for each $1 over $180 000

Source: ˝ Australian Taxation Office for the Commonwealth of Australia.

 

In a nutshell, the more you earn, the more you pay in tax. If one person in a couple receives significantly more income than the other, there may be ways to shuffle the income around (known as ‘income splitting’) so more of it falls into the tax-free or lower tax categories. The ideal situation would be to have both people placed in the same tax bracket, or one just above the other.

 

Ways to save tax by income splitting

Although it’s not possible to transfer income from personal exertion (i.e. your salary or wages) from one person to another, it is possible to have passive income from investments transferred to the name of the lower-earning spouse.

Let’s imagine that Ray is a wealthy businessman who falls into the highest tax bracket. He has an investment portfolio which nets him $15,000 a year, but he is taxed at the same high rate for this income so loses almost half. If he transfers his investments to the name of his wife, who doesn’t have a job and doesn’t have any other income, it will fall into the tax-free bracket so they’ll be able to pocket the full amount.

At the same time as transferring investments to the name of the lower-earning spouse, any charitable donations should be made in the higher-earning spouse’s name. This means that any tax deductions or refunds will then be made at the higher rate.

If you’re in the highest tax bracket and either don’t have a spouse or have a spouse who is also taxed at the highest rate, you can reduce tax on your investments by creating an investment company which pays a flat rate of 30% for all income.

 

Minimising capital gains tax

Money can also be saved on capital gains tax if the lower income earner holds the investment assets.

For example, an investor paying the highest marginal tax rate of 45% would have to pay $24,500 in tax and Medicare levy on a capital gain of $100,000. If that same $100,000 was credited to an investor with no other income, the tax would be just $8,547 – saving almost $16,000.

Do be aware that there may be CGT to pay on the transfer of an income-producing asset that was originally acquired after 19 September 1985. The cost of this may cancel out any long-term tax gains, so check the numbers for your own situation before going ahead with any transfers.

Because a transfer to a spouse is not independent or at arm’s length, an independent valuation of the property may be required to ascertain the true market value. This stops people from playing the system by deliberately over- or under-valuing a property to minimise taxes.

 

In short:

  • Income splitting is a way of distributing income between two people in a couple so that it falls into the lowest tax bracket possible
  • This can’t be done for earned income but it can help reduce taxes on passive investment income
  • Charitable donations should be made in the name of the highest-earning spouse to optimise any tax deductions
  • High-earning investors may set up an investment company which is taxed at a lower rate
  • Capital gains tax can be reduced by transferring the asset to a lower-income earner, but do check how much the transfer itself will incur in taxes to see if it’s worth it

 

 

minimising tax in marriage

Minimising tax in marriage and long-term relationships

26 Sep, 2016

Yes, we know marriage is all about love and you’re really not thinking about tax when you say “I do”, but money can be a big cause of arguments between couples so it’s important to know where you stand tax-wise once you’re officially a couple. Minimising tax in marriage can free up more of your income for the things that matter most to you.

Here are the main things you need to know about the tax implications of tying the knot (or being in a long-term relationship):

 

Do married couples need to lodge a joint tax return?

Unless you’re involved in a business together, you can continue to file individual tax returns. If you own any joint investments, each person’s share is recorded on their own tax return.

You will still need to record on your tax return that you have a spouse, and declare his or her taxable income for the year.

If you decide to change your name after getting married, there is no need to provide any certified documents; you can just note your new name on the front cover of your next tax return to let the tax office know.

 

Are there any financial downsides of minimising tax in marriage?

Your combined income will be taken into account when calculating your eligibility for Family Assistance Office benefits such as child care rebates and family tax benefits. If you don’t have private health insurance and your combined income is over $168,000, you’ll be charged an extra 1% Medicare levy, increasing to 1.5% for couples earning more than $260,000.

 

What if I’m in a long-term relationship but not married?

In the past, you may have been able to hold on to more benefits by not actually marrying your partner. Now, the ATO’s definition of a spouse has been extended to include both de-facto relationships and registered relationships – so minimising tax in marriage doesn’t actually require you to be a married couple. Your ‘spouse’ is another person (whether of the same sex or opposite sex) who:

  • is in a relationship with you and is registered under a prescribed state or territory law
  • although not legally married to you, lives with you on a genuine domestic basis in a relationship as a couple.

 

What about same-sex relationships?

Since 1 July 2009, the ATO has treated people living in same-sex relationships the same way as heterosexual couples for tax purposes. This means that same-sex couples are now eligible for tax concessions including:

  • Medicare levy reduction or exemption Medicare levy surcharge
  • net medical expenses tax offset
  • dependant tax offset
  • pensioner tax offset
  • School Kids Bonus
  • spouse super contributions tax offset
  • main residence exemption for capital gains tax

 

What if we each own a home?

If a couple owns two homes between them – one in each of their names, purchased before they met – there will be tax implications. They are only entitled to capital gains tax (CGT) exemption on one main residence between them. In this case, they can either select one residence for exemption and pay on the other, or split the CGT exemption between the homes and pay CGT on the remaining proportion of each.

As long as the properties meet the requirements for the main residence exemption, they will still both receive exemption from CGT for the period before they started being classified as spouses.

So, say Angela bought a house in 2002 and lived in it until she married Liam in 2008. She then moved into his house, which he bought in 2005. As they have chosen to use Liam’s house as their main residence, Angela’s house will be subject to CGT from 2008. Any capital growth that occurred during the six years when she lived in it alone will still be exempt from CGT.

Income splitting is another way to legitimately reduce your tax bill as a couple. You can read more about income splitting here.

 

To recap:

  • There are various strategies for minimising tax in marriage
  • You don’t have to be married to be considered a couple for tax purposes, and same-sex couples are subject to the same rules
  • Married couples can still lodge individual tax returns unless they are in business together
  • As a couple, your combined income will be used when calculating various benefits
  • If you each own a home, you will only receive CGT exemption on one of them, or you can choose to apportion it between the two

 

best deals on car loans

8 tips for getting the best deals on car loans

23 Sep, 2016

A car is a significant purchase and many people will find themselves requiring finance to fund at least part of it. Here are some of the dos and don’ts to remember when searching for car loans:

 

Don’t jump straight to dealer financing

Dealer car loans may be quick and convenient to arrange, but that’s about all they have going for them. You’re very unlikely to find a competitive loan rate being offered by your dealer, and they often put pressure on you to sign up straight away so you don’t have time to check the alternatives. The key is to do your research before you step foot in the dealership so at least you can view their offer objectively.

The same goes for manufacturer financing deals. You may sometimes see rates of 2%, 1% or even 0% offered on new car purchases, but these often come with a pile of exclusions; you can easily be ruled out because your credit rating isn’t good enough or you’re buying the wrong model of car. You may also be charged a higher price for the car itself to make up for the loss in interest charges, so approach these deals with extreme caution.

This article has more information about financing your car purchase the smart way.

 

Do check loan rates with banks and credit unions

You’ll generally find that banks and credit unions offer much more competitive interest rates than anything arranged through a dealer. Shop around, check some online comparison sites, and give yourself enough time to research your options properly before you make a purchase.

 

Do opt for a simple-interest loan

This is the kind of loan most often provided by banks and credit unions, and it means your interest is calculated each month based on your outstanding balance. You can make extra repayments to reduce the total amount of interest you pay and clear your debt sooner (at least, most providers will allow this but do check first).

Avoid “pre-computed” loans where you’re charged interest for the agreed term regardless of how quickly you pay it off.

 

Don’t focus only on your monthly repayment amount

Your dealer will likely try to lure you in with offers like “Only repay $300 a month”, but this alone means nothing. You need to know what interest rate is being applied and over what term. It’s easy to stretch the loan over a longer term so the repayments fit your budget, but when you look at how much extra you’ll be paying in interest, the deal becomes less attractive.

Sure, the monthly repayment is still important because you need to know if it fits into your budget, but if you’re saddled with a car loan spread over four or more years, you can end up going “upside down”.

This means that the amount outstanding on your loan is higher than the value of the asset you purchased with the loan, and it can easily happen with cars because they depreciate so quickly. Put another way, if you spread the loan over too long a term, the car loses value at a faster rate than you’re paying for it.

Why is this a problem? Because if you decide to sell the car part-way through the loan term, the amount you make from the sale won’t be enough to pay back the loan in full and you’ll be left with debt for a car you don’t even own anymore. Equally, if you write the car off in an accident, your insurance company will pay out according to the value of the car, not the amount you have left to pay on your loan. If you’re in an “upside-down” situation, you’ll be left with a shortfall.

Find out how to save on car insurance.

The experts’ advice is to keep your car loan term at or below 42 months (three and a half years) so that it tracks the value of your car fairly closely and you’ll be able to pay off the loan if you decide to sell the car.

 

Do put as much as you can towards a deposit

Most lenders will require a deposit of 10% to 20% on car loans. Although you may be able to find a 0% deal, it’s better to put as much as you can afford towards the deposit. This is because a larger deposit will mean less interest over the course of the loan, and you may even find that putting up a higher deposit will secure you a better loan rate.

 

Do be careful with variable-rate car loans

Most car loans will be offered at a fixed rate, but you may have the choice of a variable rate from some lenders. This means that the interest rate can go up or down during the loan term, usually tracking a particular index.

If you go for this option, although you stand to gain if rates drop, you also risk having to pay more overall for your car if there is an increase in rates. The lender may adjust your payment amount according to the rate, or they may increase or decrease your loan term while keeping your repayments the same.

Most experts agree that variable-rate loans aren’t worth the risk for this kind of purchase.

 

Do weigh up the benefits of any special offers

Dealers may offer you a choice of benefits, for example a loan rate of 3% or $1000 cash-back. To make the most of these, you need to crunch the numbers and work out which will save you more overall. And if you do opt for a cash-back deal, put that money straight towards paying for the car.

 

Don’t put your house on the line

One option when it comes to car financing is a home equity loan, which allows you to free up some of the equity in your home and essentially add the cost of your car to your mortgage.

This does allow you to access lower rates but – and it’s a big but – you’re taking a massive risk by buying a depreciating asset like a car with your home as security. If something happened and you couldn’t keep up with repayments, your home could be repossessed for the sake of a car.

The other thing with this option is that your home loan provider will probably be happy for you to stretch the loan term over 10 or even 15 years. This might sound like a great deal because it adds so little to your monthly repayments, but the amount of interest charged over this time would probably be enough for you to buy another car.

In addition, if you want to replace your car in three or five years’ time, and you again borrow against your home equity, and then do the same again a few years later, you could end up paying for three or four cars at once when you only own one. It’s just not a smart way to handle your money.

 

To Summarise: the dos and don’ts of financing a car purchase

  • Don’t automatically accept the finance package your dealer offers – do your research so you know what a fair market rate is
  • Do use comparison sites to check prices for loans with banks and credit unions
  • Do choose a simple-interest loan rather than a pre-computed loan
  • Don’t focus only on your monthly repayment amount – consider the interest rate and loan term to make sure you don’t end up “upside-down” owing more than your car is worth
  • Do make your deposit as big as you can afford – you’ll pay less in the long run
  • Do be careful with variable-rate loans – the potential risks may be too high for a car purchase
  • Do weigh up the benefits of any special offers – if you have to choose between two, work out which one will be of most value
  • Don’t risk your home for the sake of a car – home equity loans are best avoided when it comes to car loans

 

how to use a debit card

6 simple tips for smart and secure debit card use

21 Sep, 2016

If you’ve weighed up the pros and cons of credit and debit cards and decided a debit card would work for you, here are some steps you can take to use it wisely and keep your money secure.

 

1. Budgeting

Having a debit card means you can only spend the money you have in your account. Budget carefully to make sure you have enough money to last you until you next get paid, particularly if you’ve been used to the bottomless pit of a credit card.

 

2. Debit card security

Memorise your PIN (personal identification number); never carry it with your card and don’t make the number something obvious like your birthday or other personal information.

 

3. Keep track of your funds

Know how much money you should have in your account at any given time so you can quickly pick up on any discrepancies and investigate them further.

 

4. Report any concerns

If you notice a mistake on your statements, if you’re worried your card has been used fraudulently, or if your card is lost or stolen, call your card issuer immediately.

 

5. Spread the risk

If a thief manages to access your account, he may also be able to reach any savings accounts that are linked to it. To minimise the risk of this happening, you may want to hold your debit card account with a different provider to any of your other accounts, and also limit your balance to a few hundred dollars at a time.

 

6. Be secure online

When using your debit card for an online payment, make sure the website is secure and you don’t store a copy of your card details anywhere on your computer.

 

 

credit card myths

Tackling credit card myths: know your facts

19 Sep, 2016

With over 70% of Australians owning a credit card and upwards of 16.5 million in circulation, you’d think we’d understand everything about them. Unfortunately this is not the case, and the card companies like it that way, because the less you know (or pay attention to), the more they can get away with. Let’s tackle some common credit card myths and misconceptions so you can make wiser choices.

 

Myth 1: A fixed rate is a fixed rate

Wrong! Your card issuer has the right to alter a fixed rate at any time by giving as little as 15 days’ notice in writing. If you don’t pay careful attention to any letters or emails you receive from your card company, you may be paying more than you realise and that deal that once seemed pretty competitive can lose its appeal.

 

Myth 2: Having lots of credit cards is good for your credit rating

Nope! Having one – at most two – carefully managed cards (meaning you pay off the balance in full each month) can boost your credit rating. Applying for all the cards you can lay your hands on, even if you don’t use some of them, can actually hurt your rating because potential lenders look at the total amount of credit available to you – not the debt you actually have. Having a lot of cards will make it appear that you’re overextended even if this is not the case.

 

Myth 3: It doesn’t matter if I’m just one or two days late with my payment

Think again. This is one of the credit card myths that catches many people out. At the very least, you’ll be hit with a hefty late payment fee. Worse, if it happens several times, your provider may increase your rate or even cancel your card. Get those bills paid on time!

 

Myth 4: Cash advances are charged at the same rate as purchases

Wrong – probably. If you’ve got yourself a good deal then the rate may be the same, but you’ll more than likely still have to pay a fee for each cash advance. Most card issuers, however, charge much higher interest rates for cash advances than the advertised purchase rate. Just another reason to get on top of your finances so you don’t have to rely on cash advances each month.

 

Myth 5: I won’t be charged anything if I pay off my balance in full each month

Well, check the small print of your contract. Some ruthless companies, realising they can’t make any money from interest if you don’t carry a balance, will instead charge a fee for not carrying a balance over from month to month. If yours is one of them, it’s time to get yourself a new deal.

 

Myth 6: It doesn’t matter what point in the month I make payments

Maybe. It depends on how your card provider calculates your balance each month. In some cases it doesn’t matter when you make payments; in others, the longer you leave it before paying, the more interest you’ll rack up. A full explanation of the different methods used can be found in this article.

 

Myth 7: Credit card trouble won’t affect my home

Don’t be so sure about that. If your credit card is tied to your home’s equity then missing payments puts your home at risk. Again, check the small print in your contract to see where you stand.

If your mind has just been blown by having all these credit card myths busted then it’s time to sit down with your contract and card statement and get to grips with all the nitty gritty terms and conditions that apply to your card. If it seems like you’re getting a raw deal, shop around and see if you can find something better out there.

You might also want to read this article with more credit card traps to avoid.

 

How can you find out your credit score for free?

If you haven’t already, create an account here. It’s simple, safe and 100% free to receive your credit score and comprehensive credit report.

 

applying for a credit card

How to choose the right deal when applying for a credit card

16 Sep, 2016

Are you thinking of applying for a credit card? Many experts would say that the right credit card for you is no credit card, since they offer one of the highest-interest forms of debt around and, unless used with absolute self-control, can be the start of a slippery slope to debt misery.

That being said, they do have their uses. So if you’ve weighed up the pros and cons and decided you want to apply for a credit card, here are some things you need to look out for when deciding which one is right for you.

 

Things to consider when applying for a credit card

Before filling out any application forms, make sure you know exactly what you’re signing up for by asking the following questions.

Card issuers are legally required to provide a lot of this information when you’re applying for a credit card, but if you can’t find the answers you’re looking for, don’t be afraid to ask them directly. If the company is reluctant to provide any of these details, it might be that they’re trying to hide their high fees or conceal unreasonable terms – better to find another provider who will be completely honest with you.

 

1. Is there an annual fee?

Some card issuers won’t charge an annual fee at all whereas with others it may be $100 or more. They often tie in extra ‘benefits’ with the fee, but you need to be completely honest with yourself about whether you’re going to make enough use of these to make up for the fee you’ve paid. Chances are you’ll be better off opting for a card with no annual fee.

 

2. Will I be charged any other fees?

Spoiler alert: the answer is ‘yes’. There are always other fees associated with credit cards. Among these you might find:

  • Account closing fee
  • Balance transfer fee
  • Cash advance fee
  • Fee for paying all your charges each month
  • Finance fee
  • Inactivity fee
  • Late payment fee
  • Maintenance fee
  • Overdraft fee
  • Research fee
  • Declined payment fee

What you really need to know is, which of these fees are likely to apply to you on a regular basis? And if you’re just making the most of a special introductory offer on this card, how much will it cost you to transfer a balance over to it and then close the account when you’re done? Fees like this can quickly add up and make your money-saving strategy less appealing.

 

3. What is the interest-free period?

Most card issuers don’t start charging interest from the date of your purchase; they give you a fixed period of time in which you can clear the balance before interest starts accruing. You want this to be as long as possible, but do remember that it only applies if you pay your balance in full each month.

 

4. What charges apply for cash advances?

Many people make use of the cash advance facility on their card, assuming the withdrawals are subject to the same rate as any purchases. Not true. Card issuers usually apply a higher interest rate to cash advances on top of a cash advance fee, so those notes in your hand have actually cost you a lot more than you might realise.

In addition, cash advances are usually not eligible for your interest-free period, and in fact you may find that none of your purchases are interest-free in a month when you’ve made a cash advance.

If you think you’ll need this facility, despite all these warnings, then look for a card that charges a low – or better no – cash advance fee and the same interest rate as you get on purchases. Also make sure that cash advances won’t affect your interest-free period on purchases.

 

5. Is there any penalty for not carrying a balance?

If you pay off your balance in full every month (or stop using the card for a while), the card provider doesn’t make much money from you. Some nasty companies will charge you a fee for not carrying a balance to make up for this loss of profit. It goes without saying that such companies should be avoided like the plague.

Read more about this and other things that catch people out when applying for a credit card in our credit card myth-busting article.

 

6. How is interest applied to the outstanding balance?

There are many different ways that card companies may calculate the outstanding balance on your card in order to apply interest. Confusing as this may seem, it’s important to understand which method is being used when applying for a credit card because this can make a big difference to the amount of interest you end up paying:

a) average daily balance method including new purchases: The balance is the sum of the outstanding balances for every day in the billing cycle (including new purchases and deducting payments and credit) divided by the number of days in the billing cycle.

b) average daily balance method excluding new purchases: As with method (a) but excluding new purchases.

c) two-cycle average daily balance method including new purchases: The balance is the sum of the average daily balances for two consecutive billing cycles, divided by two. One average daily balance is calculated via method (a) above; the other average daily balance is taken from the preceding billing cycle.

d) two-cycle average daily balance method excluding new purchases: As with method (c), but the first average balance is calculated via method (b) – excluding new purchases.

e) adjusted balance method: The balance is calculated as the outstanding balance at the beginning of the billing cycle plus or minus payments and credits made during the billing cycle.

f) previous balance method: The balance is simply the outstanding balance at the beginning of the billing cycle.

Got that? Good, now you might be wondering which of these methods works out best for you, the consumer.

Generally speaking, the two-cycle methods (c and d) will generate the highest interest charges, so they should be avoided. For most consumers, the average-daily-balance methods (a and b) will result in lower charges. The adjusted balance method (e) and the previous balance method (f) may work out as the best option, depending on how much of a balance you carry forward and when in the month you tend to make payments and purchases.

 

7. What interest rate(s) are applied to purchases and cash advances? Are they fixed or variable rates?

Having established the method your card issuer uses to charge interest, you need to know what rate you’re actually going to be charged. This is usually expressed as an annual percentage rate (APR), and you can divide this by 12 to get the periodic rate – the rate that will be applied to your balance each month.

Again, if you’re planning to use cash advances, check to see whether the same rate applies to these.

Also find out whether the rates are fixed or variable. If variable, ask how often the rate is subject to change and to which index it is tied. Be aware that even fixed rates can change if the card issuer gives you notice.

Finally, ask about any penalty rates that might apply. Some companies, for example, reserve the right to significantly increase your rates if you’re late making payments twice in any six month period.

Armed with all this information, you should be in a pretty strong position to choose the right credit card for you. Now you just need to make sure you use it wisely to avoid racking up an unmanageable level of debt. For some tips on savvy credit card use, take a look here.

 

To Summarise:

  • Applying for a credit card is not a step you should take lightly, but if you do decide to get one, make sure you find a deal that’s right for you.
  • Understand all the fees your card will be subject to, including annual fees and any for one-off occurrences. Avoid providers that will charge you a fee for not carrying a balance as this creates a lose-lose situation for you.
  • Try to avoid cash advances, but if you think you’ll need them, make sure you understand the true cost and aim to find a card with lower cash advance charges.
  • When applying for a credit card, understand how your balance is calculated, what interest rate(s) are applied to it, and how this affects the overall cost of using your card.

 

using a credit card

Our top 10 tips for smarter credit card use

14 Sep, 2016

After putting so much effort into choosing the credit card with the best rate and lowest fees, you would be silly to not put the same amount of care into using it carefully. However, experts say that most people end up with card trouble not because they picked the wrong card, but because they’re not using it sensibly.

So if you do opt for a credit card, make sure you stick to these guidelines to stay in control of your money:

 

1. Have no more than two cards

Having just one card is really the best way to stay on top of your finances, but if you need more than one for whatever reason, keep it to two. If you already have more than that, consider rolling all the balances into one or at least paying the rest off very quickly and then cancelling them.

 

2. Understand the terms and conditions

Credit card issuers love to hide behind the small print in their contracts, so it’s important you understand everything you’re signing up for instead of just looking at the headline figures. Always check your statements carefully to make sure you’ve been charged correctly, and question any items you’re unsure about.

 

3. Read your statements

It’s not just charges that you need to be checking your statement for. It might not be the most riveting read, but you should check every line against your purchases for the month ‘t been cking your statement for. It might not be the most riveting read, but you should chto make sure you haven’t been overcharged and, more importantly, that your card isn’t been used fraudulently.

 

4. Decide your own credit limit

Your provider might offer you a much higher limit than you actually need; that’s because the more you use it, the more profits they pocket. You need to put yourself first and set a reasonable limit – somewhere between $500 and $1500 per card should be about right. In any case, don’t accept a credit limit that is higher than what you could comfortably pay back in one month.

 

5. Leave your credit card at home

Unless you know you’re going to need it and you’ve carefully considered the purchase, leave your credit card at home to avoid being tempted by impulse buys.

 

6. Don’t pay late

A late payment will result in extra fees and interest charges, and it’s your responsibility to pay on time. The easiest way to avoid any delays is to set up a direct debit to automatically pay your bill each month – preferably just after you get paid.

 

7. Pay early

If you can’t pay your balance off in full, paying as much as you can as early as you can will save you money in interest charges, assuming your outstanding balance is calculated using the average-daily-balance method.

 

8. Know your interest-free period

If your card comes with an interest-free period for purchases, know what this is and make sure you time your purchases and payments accordingly. This is particularly important for any large purchases since once they become subject to interest, it can pile on quickly.

 

9. Don’t ignore those letters

You might assume that an email or letter from your bank is unimportant, probably just trying to sell you something new, but it might be notifying you of changes that will affect the way you’re charged, such as higher interest rates or a reduced interest-free period. Do make the effort to read everything they send you, and if you’re unhappy with any changes, start shopping around for other deals.

 

10. Be an unprofitable customer

How do card providers make their money? Interest charges and other fees. Your aim is to become a terrible customer to them by using your card in a way which incurs minimal fees and charges. The biggest thing you can do to help this cause is to pay off your balance in full and on time every month. If this seems a bit unrealistic given your current level of debt, start paying back as much as you can each month so the balance starts to reduce slowly but surely.

Read about some other ways you can stay in control of your debt.

 

quick debt reduction

Your rapid debt reduction plan for better finances

12 Sep, 2016

There is no quick and easy overnight solution to debt reduction, no matter how much debt you may have, but there are steps you can take to tackle it more quickly.

If you’ve identified that you have a debt problem – perhaps you’ve taken on too much bad debt or your credit cards have got out of hand – or have noticed just a couple of warning signs that your financial situation is less than perfect, what should you do next?

 

Step 1: Stop taking on more debt

Yes, it’s easier said than done, especially when you’re under financial pressure and your credit card is crying out to you for some attention, but if you’re committed to tackling your debt you must stop adding to it.

This means you’re not going to take out a loan to buy that new car, and you mustn’t borrow against your home to give your bathroom a makeover. Perhaps most importantly, those credit cards will have to get used to being neglected. The most effective action is to just cut them up and stop using them completely, but if you absolutely must have one just for emergencies, make sure it’s hidden away – out of sight, out of mind. And no, needing a Chinese on Friday night doesn’t count as an emergency, and neither does that new party outfit you have your eye on. Your new mantra will become: “If I don’t have the cash, I’m not buying it.”

Get more of our tips for dealing with an overspending habit as you work towards faster debt reduction.

 

Step 2: List all your outstanding debts

Now you need to prioritise your debts. To do this, make a list of all your current outstanding debts including the balance you owe, the interest rate being charged, the monthly payment you make, and the number of months it will take to clear the balance. Your credit card statement should show the length of time it will take to pay off the debt if you only make the minimum repayments each month.

Now, number them in order from the highest interest rate to the lowest. You’ll probably find your credit card and personal loans near the top of the list, while your mortgage should be down at the bottom.

 

Step 3: Pay more towards the debt with the highest rate

Once you’ve identified the debt that’s accruing interest at the highest rate, you need to start throwing some extra cash at it.

If you have a budget that should help you find some ways to trim a few dollars here and there off your current expenses so you have some extra funds to pay back your debts faster. Any amount will help, but to really make a difference you should make an effort to pay back as much as you possibly can on your debts each month.

The important thing about this method is than once you’ve cleared one debt, you keep your total repayment value the same as you move on to the next debt.

For example, say Rod has two credit cards, a personal loan and a mortgage. His highest-rate debt is one of the cards at 20%, and he’s decided to up his monthly payment to $250 on that. Once he’s paid that card balance in full, he will keep paying that $250 each month but will use it for the next-highest debt, in addition to what he was already paying back on it. The overall payment never increases, but as each debt is paid back he has a higher amount to put towards the next one.

The only possible variation to this rule comes when one of your debts is accruing at a relatively low rate but is also low in value or has a short pay-back time. Although clearing the highest-rate debt first will save you the most money in the long run, the achievement of completely clearing one of your debts can be a great source of motivation to continue with your debt reduction plan. If you could clear one of your lower-rate debts in, say, 3-4 months, then you may want to target that one first before moving on to the higher rates. And don’t forget, once that debt is paid back, the money you were putting towards repayments should be redirected to the next debt.

 

The path to quicker debt reduction:

  • There is no quick fix where problem debt is concerned, but following these steps can provide you with the fastest route to financial freedom
  • First, stop taking on any more debt, whatever form it takes. Cut up your credit cards or keep one for absolute emergencies, only buy the things you can afford, and pay for them in cash
  • List all your debts and order them from the highest interest rate to the lowest
  • Work out how much extra you can afford to put towards you repayments each month, and use that money to pay back the debt with the highest rate first
  • If you have a debt with a lower rate that will be quick to clear, you may target this first instead
  • Each time you clear a debt, maintain the same level of repayments but funnel the extra money into the next debt on your list

 

assessing debt situation

Assessing your debt situation to stay in control

09 Sep, 2016

We’re all agreed that not all debt is bad; when used wisely it can help you increase your wealth and secure a good future for you and your family. But it can easily turn the other way and place you in financial turmoil for years of your life as the result of just a few bad decisions. Make sure you regularly assess your debt situation to see where you stand.

 

Good Debt and Bad Debt

So how do you know whether a particular type of debt is good or bad? Here are the main characteristics of the two types:

Good Debt

  • Lets you achieve a worthwhile goal such as buying a house, starting a business, or obtaining a qualification
  • Makes your life better
  • Is manageable
  • Is not a burden to you

Bad Debt

  • Accrues from purchases you don’t really need or will quickly consume, such as meals, holidays and gadgets
  • Makes your life more stressful
  • Seems impossible to pay back
  • Makes you feel guilty and causes fights with your loved ones

The most important thing to remember, really, is that good debt is a carefully considered investment in your future whereas bad debt is linked to consumption and purchasing things that will lose value quickly.

 

How much debt is too much?

There are two main ways to determine whether you’ve got yourself into too much debt: one is by looking at the numbers and the other is by examining your financial behaviour and the impact that debt is having on your life.

 

Calculating your debt ratio

The most accurate way to assess your debt situation is to add up everything you own (your assets) and everything you owe (your liabilities), then feed them into this calculation:

Current assets ÷ current liabilities = debt ratio

So, if you have assets of $60,000 and your liabilities total $35,000 then your debt ratio would be 58% (60,000 ÷ 35,000 = 0.58)

If you’ve already calculated your net worth then you should have these figures to hand; if not, find out more about how to determine your assets and liabilities here.

If your debt ratio comes out below 30%, you don’t have too much to worry about. If it’s between 30% and 50%, you’re doing okay but should avoid taking on any more debt and think about how you can start repaying what you owe more quickly. Between 50% and 100% your debt is definitely too high and you need to take steps to reduce it straight away. Over 100% you’re in serious trouble.

 

Debt as a percentage of income

Another way to crunch the numbers on your debt is to evaluate your monthly repayments as a percentage of your income. Here is the calculation:

monthly debt payments ÷ net monthly income x 100 =debt as % of income

So if your monthly income is $2,000 and you make debt payments of $400 a month, your percentage is 20% (400 ÷ 2000 x 100 = 20).

With this calculation method, you should be aiming for below 10% to show your finances are in good condition. 20% is acceptable if you’re single, middle-aged and on a decent income. If you’re married without kids and both earn, 20% is okay as a combined percentage, but if you do have children it should stay below 15%. Retirees should keep their debt to below 10% of their income.

If you find that your debt exceeds these levels by 10-15 percentage points, you’re probably still quite safe but need to work to bring it down to acceptable levels. If you’re approaching the 50% mark, you need to take serious action, especially if your employment prospects are uncertain or you’ve got some major expenses coming up like tuition fees or the birth of a child.

Anything over the 50% mark means you have a serious debt problem.

When using this calculation, do note that it’s based on your current repayment amount. If you have a credit card and only repay the minimum amount each month, that may make your debt-to-income percentage nice and low but it’s not going to do you any favours in the long run. Paying back a higher amount is the best way to save yourself money on interest charges.

 

Evaluating the impact of debt

The numbers can give a good indication of the health of your finances, but the sad thing about debt is that it can put you under constant stress and take an emotional toll. It can often start off with just one or two late repayments and quickly snowball into a full-time job as you try to work out how to keep all your creditors off your back from one month to the next.

Therefore, answering ‘yes’ to just one or two of the following questions may be an early warning sign that you need to turn things around before you slip further into debt.

  • Is it costing you more and more each month to pay your bills?
  • Do you have to delay paying your bills because you don’t have the funds to cover them?
  • Are you at or over the limit on your credit accounts?
  • Have you been turned down for credit purchases because you’re over the limit?
  • Is it taking you 2 or 3 months to pay your bills when you used to pay them straight away?
  • Do you have to stick to the minimum repayments on your credit card(s)?
  • Do you often get hit with late penalties on your bills?
  • Does managing your money feel like a constant juggling act?
  • Are you paying your bills with money that was set aside for other things?
  • Are you using your credit cards to pay for normal living expenses?
  • Do you have hardly any money in savings?
  • If you lost your job, would you be in serious trouble immediately?
  • Are using one loan to pay off another?
  • Have you had a credit card cancelled by the issuer because you were consistently paying late or over your limits?
  • Have you had to cancel an insurance policy because you couldn’t afford the premiums?
  • Are your creditors chasing you for payment by sending letters or calling you?
  • Have you resorted to working overtime or juggling different jobs just to make ends meet?
  • Have your utilities been shut off, or have you received shut-off notices?
  • Is your bank account regularly or constantly overdrawn?
  • Is money a great cause of stress or worry for you?
  • Does money cause a lot of arguments in your family?
  • Are you hiding the true extent of your debt from someone close to you?

If you answered ‘no’ to all of these then you probably have no reason to worry about your finances. But just one or two ‘yes’ answers can be the sign of underlying financial problems, so it may be a good idea to look more closely at the areas causing you trouble.

If you answered ‘yes’ to a fair number of these questions, it sounds like you definitely have a problem with debt and should seek financial help before it gets any worse.

 

Assessing your debt situation in a nutshell:

  • Not all debt is bad; when planned carefully and viewed as an investment, it can bring long-term benefits
  • If you’re using debt to make everyday purchases and buy things that will lose value quickly, chances are you’re holding bad debt
  • You can look at your total liabilities as a percentage of your assets, or calculate your debt repayments as a percentage of your income to gauge the severity of your debt situation
  • If you’re starting to struggle with paying your bills on time and managing your finances, now is the time to take action before your debt situation escalates

 

Assess your debt situation and keep track of your finances for free with Monefly today: www.monefly.com