The insult you want your bank to call you
IT'S time to disappoint the banks and become a "deadbeat".
While it may sound like an insult, the term "deadbeat" is used in the world of finance to describe someone who pays their credit card in full and on time every month - meaning the banks can't make any money off them in interest payments.
According to an analysis by Credit Simple, more than half a million Aussies failed to pay off their credit card balances in March, leaving $32 billion in accrued debt with an average of $4200 per cardholder.
The credit score website is urging Australians to become "deadbeats". It says paying off your card on time will help improve your credit score, which could help you get a better deal from banks, energy companies and telco providers.
"Everyone approaches spending on their credit card in a different way - whether they pay it off in full each month or they carry a balance," Credit Simple spokeswoman Emily Price said.
"Some people like to use credit cards for their everyday spending so they can get the most out of rewards programs and get extra treats. And some people simply don't budget and end up using credit cards to get by."
A credit score is a rating between zero and 1000 indicating your financial history - the higher the score, the more attractive you are to lenders. Consumers have a legal right to obtain their credit score for free through one of the three credit reporting bodies - Dun & Bradstreet, which owns Credit Simple, Veda, which owns GetCreditScore, and Experian.
Sixty-three per cent of consumers have a credit score of 700 or over, considered "great".
Ms Price said consumers who paid off their credit card in full each month would see their credit score improve. "Consumers with better than average scores should use them to their full advantage by picking up the phone and asking for a better deal," she said.
A balance transfer credit card, where one bank pays off any outstanding debt from a previous bank at a lower interest rate, can be a good option. "Remember these offers usually only exist for an introductory period, so make sure you make the repayments while the low interest rate is still in place," Ms Price said.
Another option is to consolidate your individual debts into one low-interest personal loan to make payments simpler to manage and minimise fees. Failing that, working out which order to pay your debts is key. "Lay out a clear repayment plan, especially if you have multiple debts," Ms Price said.
"As a rule of thumb, it is usually best to pay off debts with the highest interest rate first and you should look to wipe out your debts one at a time - even if that means starting with the smallest. Consider working with a financial counsellor or adviser who can help you consolidate your debts and work out the best repayment plan for you."
Lowering your credit card limit, reducing the number of cards you have, or opting for a debit card instead can help prevent overspending. "If you do need to spend on your card, remember to make repayments on time to avoid negatively affecting your credit history," Ms Price said.
Finally, it "may seem like an obvious tip" but creating a budget can "help you identify any unnecessary spending or areas that could be cut back", she said. "Remember that it can take a little time to wipe debt, but you'll be in the black much faster if you maximise your credit card repayment each month."
Others ways to improve your credit score include contacting a current or former lender, utility or phone company and working out how to correct a default or late payment.
According to consumer group Choice, Aussie banks are ripping off consumers to the tune of billions of dollars by refusing to pass on the benefit of Reserve Bank interest rate cuts.
Credit card interest rates have barely changed in six years, despite the official cash rate dropping by 3.25 per cent since mid-2011. Failure to pass on rate cuts has cost Australians $3.49 billion in that time, an average of $220 each in extra interest payments.
Appearing before a parliamentary committee earlier this year, bank bosses were grilled on credit card interest rates, with only ANZ receiving praise for reducing the rate on its "low-rate" card by 200 basis points to 11.49 per cent.
WHAT YOUR CREDIT SCORE MEANS
• 1000 - This is the 3.5 per cent of consumers who have been dubbed "credit unicorns", as they are in the best financial position possible. To join their ranks, watch your score closely and keep paying bills and loans on time to ensure your ranking doesn't drop.
• 800-999 - This is the 22 per cent who have a superb rating. They should speak to banks, telcos and energy providers regularly to ensure they're getting a good deal.
• 700-799 - This is the 41 per cent who have a great rating. They are in a strong position to negotiate better deals, but probably haven't been doing so.
• 500-699 - This is the 23 per cent who are about average. Often, people without much credit history fall into this category. Make sure you do your homework before applying for loans or signing contracts.
• 300-499 - This is the three per cent who, frankly, need to up their game. People fall into this category for failing to pay bills on time or even a recent default. Check your credit score regularly to ensure there are no surprises.
• 0-299 - This is the 7.7 per cent of people who are not doing so well. People in this area likely have unpaid defaults or a bankruptcy on their files. They should start by ensuring bills and loans are paid on time and seek financial advice.
(Source: Credit Simple)