Use of credit cards

Perhaps you mean with cash advance.

There’s a fundamental you’re probably missing.

http://m.yourmortgage.com.au/article/how-to-get-your-credit-card-debt-under-control-79362.aspx

You can’t keep borrowing on credit and get a loan, eventually the banks will refuse.

Yes it is possible.

But the negatives are:

– hurts serviceability by having a number of credit cards
– if you forget to pay on time or accidently pay less you will start paying penalty interest
– you will be paying PI and not IO
– tax deductibility issues as easy to accidently lose deductibility of interest.
– if you use the card you will be incurring interest

I did this many years ago but paying $20k for a car using a cash advance (just went into bank and took out cash from CC). Then immediately did a 12 month balance transfer at 0% interest. I had credit cards with different banks so had to manually pay them by transferring money. After about 4 months I got a bit slack and forgot to pay on time. I copped a penalty charge and then large interest from then on – so I just paid it out.

Hi Bjoern,

Or are there other/better ways to use credit cards?

There was a book out about 15 years ago that talked of some interesting ways of using a credit card. Back then there was no Offset Accounts, but there was some kind of loan that worked in a similar way. I will talk of using an Offset Account as it makes more sense today.

The premise was that, since interest is calculated DAILY but added monthly, with CAREFUL use of a credit card, the homebuyer could do some serious damage to a mortgage. In our case, put some serious extra cash into an Offset Account.

The skeleton of the plan was to put EVERYTHING into the Offset Account as it arrives – this includes salary, lotto winnings(?), a birthday gift of cash, a Tax Return cheque, etc.
1. Shop weekly and all purchases go on the credit card.
2. If you eat out with friends and cash is pooled on the table, collect the cash and pay from your credit card, but Deposit the cash into your Offset Account next day.
3. If your Mum has saved up for a new Lounge suite, and is about to pay cash, offer to pay it on your credit card and take the cash and… (you guessed it) pop it into the Offset.
4. Think of other ways you can take cash in return for using your card – e.g. maybe shop with Mum and Dad, pay for THEIR shopping on your card, and take their cash.

It sounds a bit strange, but if your parents know they are helping you by doing this, wouldn’t they want to? In fact, maybe THEY would like to contribute some savings of their own – offer them a BETTER Interest Rate than what they are getting in their savings account.

The MAIN thing is that your credit card is PAID IN FULL on the due date (no slip-ups mind…) from the Offset account. In that way, you pay no interest. Don’t draw cash from that credit card though – pay everything on the card – if you need cash, draw it from the Offset.

So what do the savings look like? Let’s say you earn $5000 a month after Tax. And maybe you need $4000 a month to live (food, petrol, clothing, mortgage, etc). You need a spreadsheet to work it out, but you might have a few days with $5000 in your Offset before you need to take some out. If your Mortgage Interest Rate is 5%, then $5000 earns you about $20 a month.

OK, not big news right off – but over time, as your Offset Account grows (by at least $1000 a month – and, did Mum buy a new Lounge Suite, or did she offer to drop $20k in your account?) you could find yourself with $20k or $50k in the Offset. The more that stays in the account DAILY, the better off you are. And with $20k in there full time, that is around $1000 a year.

And now, though it shouldn’t make any difference, (because you ALWAYS pay off the credit card as it falls due, so no Interest is paid) WHAT now can you do with another 0% credit card? Will it allow you to keep your IP expenses separate from your daily living expenses? Can RENT be added to an Offset account but all bills for the IP paid from the credit card? What will THAT allow you to save? Given that rent is paid weekly, but Rates are paid quarterly, there is a serious amount that accumulates before you need to pay Rates. So all good…..

Bjoern, I’m sorry I can’t think of the actual name of the book, and I don’t even know if it is still available to purchase. The name was something like “How to pay off your home loan earlier” (or similar to that). Hope that helps…..

Benny

Benny, I have that book.
It is called “own your Home year’s sooner without making extra repayments” by Gill and Therry

It is the best book that I have ever read on learning about the compounding of interest.

BUT the method described involves using LOCs and anyone implementing the ideas using a LOC would create a tax nightmare.

Fortunately the same ideas can be applied to using an offset account and thereby avoiding the tax issues.

thats it Benny

I lent my one to a client year’s ago and he lost it so I only recently bought another one from ebay!

Bjoern I would never advise my clients to do that. What sort of rates did you fix at? Variable are generally lower than fixed atm.
What if you want to or need to move lenders?