When I am reviewing a clients loan structure we will almost always have a quick discussion about credit cards.

I personally like credit cards, the main reason being you are not spending your money, you are spending your banks, with the initial purchase. This means I have use of that money for longer and I am able to use my money to offset some of the interest cost of my mortgage. However this strategy only works if the credit card balance is paid in full each month, as no interest is then charged. However any time the balance is not paid you are typically looking at interest costs of around 20%, or 3 to 5 times current mortgage interest rates.

This is the significant negative aspect of credit cards, and one of the reasons they are so readily available – a 20% interest rate is a great earner for any financial intuition. It is worth noting that NZ banks are some of the most profitable in the world!

I was wondering what potion of credit cards actually as used properly/improperly and came across the following statistic from the Reserve Bank;  ‘around 66% of credit card advances are incurring interest’.  Not a great statistic, so only 1/3 of advances are not incurring interest of up to 20%. Total credit card outstanding balances are $6.547 billion dollars (June 2015 Reserve Bank). These are worrying figures.

Credit cards are easily available and having a $100-$200 charge each month would not appear to be something to worry about. However continuously having this debt over a number of years has huge financial implications.  Good profits for the banks, significant compromises for your personal finances.

Credit cards are a good indicator of overall financial health/ awareness. And it is an easy check, is there typically an outstanding balance on yours?

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The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.