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Allison Tait Interview About Credit Cards
Allison Tait is the author of the excellent book Credit Card Stressors. This book provides an in-depth look at why people use and love their credit cards. In addition, the book deals with eliminating credit cards and paying off debt. We are lucky enough to have a great interview with him this month.
OK Allison, maybe you could tell us a little bit about your background and what you’re doing now?
I am a journalist with more than 20 years of experience. For the past eight years I have specialized in personal finance writing for ninemsn Money and MSN NZ and more recently for Madison and news.com.au. I am very good at asking questions!
Allison, you have written a book called Credit Card Stressors. There you talk about all the reasons why people should cut their card. But if you had to narrow it down to just three top reasons why people shouldn’t get a credit card, what would they be?
In the book, I advise people to cut up their cards because that means you have a problem with credit card debt when you read the book. I think the three biggest problems with credit cards are:
1. They create distance between the purchase and the payment – and make it much easier to spend money and live beyond our means.
2. People seem to forget that the money they spend isn’t theirs – it belongs to the credit card provider and comes at a hefty price (high interest rates).
3. Credit card debt minimum payments are designed to keep the bank happy – they are not designed to pay off your debt. If you only pay the minimum payment, it could take years and years to clear the debt and cost you thousands of dollars. To use a credit card wisely, you need to pay it off in full each month.
How did you come up with this idea and why did you want to write this book?
I was approached to write this book as part of a series (there is also a great book called Mortgage Stressbusters). At the time I wrote this, Australians had record levels of credit card and personal debt. I wanted to write a book that was easy to read, practical and maybe entertaining. I really wanted readers to get to the end of the book (which is sometimes not mean in finance).
In the book, you ask the question, from the readers’ perspective, “How do you live without a credit card when the world is set up that way?” What do you mean the world is set up like this and how does one live without the convenience of a credit card?
The world is moving away from cash and towards cards. Some analysts go so far as to say that in 30 to 50 years we may be completely cashless. In this day and age you need a credit card to book almost anywhere (especially online) and marketing has us thinking that convenience is the key (you only have to see the latest “Touch and Go” commercials where a man trying to pay cash is treated as a social pariah). It’s hard to get by without a credit card.
But there is a solution and it is a debit card. Same convenience and access, but you’re using your own cash, so less chance of getting into personal debt.
In your book, you use real stories from real people struggling with credit card debt. Is there a story you remember about someone who was in debt that you would like to share? (Special case)
One that stood out to me was a woman who fell under the creeping border curse. He received so-called pre-approved limit increase letters from his financial institution, which arrived at a time when he might need extra money (Christmas, summer vacation, etc.). Her provider also allowed her to go over her limit instead of rejecting the card. Her credit card limit went from $1,000 to $4,500 over time, almost without her realizing it—all while she was still trying to pay off a foreign credit card with a $7,500 limit.
He worked hard to pay off both debts, all the while comforting himself that his credit card debt wasn’t the worst in his circle of friends. One of his associates had $30,000 in credit card debt.
It just goes to show you that you need to take a long, hard look at your financial situation before you accept that the bank has your best interests at heart in offering you a rate hike. A lot of people think that “they wouldn’t offer it if they didn’t think I could afford it”, but this requires more research.
What are the biggest excuses you hear from people in debt for not ditching their credit cards?
They say they keep them for the “reward” but those air miles are very expensive if you can’t afford them. They say they need a card for emergencies, but unfortunately, emergencies seem to happen again and again.
What do you think about credit card marketing?
Like all marketing, I think it’s designed to promote credit cards; to sell the dream. Each of us has to take control of our finances and decide if the dream is worth it.
Have you always been good with money and budgeting, did it come naturally or did you have to learn. And if you weren’t good at some point, what made you change?
I think we all have to learn to some extent. My parents were always very sensible about money and taught us all the importance of saving. As for credit cards, I got my first when I was 23 when I went abroad for a couple of years. It had a low limit and I didn’t use it that much. My worst credit card years were in my late 20s when I was single, working in magazines and having a grand old time! But it didn’t take me long to realize that wasn’t sustainable – and the extra hard work needed to earn extra money to pay off debt was a good, hard lesson. I never got too crazy though. I have a healthy respect for money.
If someone is really drowning in debt, what would be your first piece of advice?
Get help. There are many great free financial counseling services available and they can really help you crunch the numbers and look at your options. In order to overcome your debt, you need a clear picture of that debt – no matter how ugly it is. Oh, and cut up the credit card! You can’t pay it off if you’re still using it.
If you could go back in time to your 21st birthday and give yourself some money advice, what would you say?
I don’t think I would change too much. I’d probably be a lot richer now if I put the money I spent traveling abroad for two years into a house deposit, but I’d be a lot poorer on the experience side of the equation. I think the key is to live within your means. If you don’t spend what you don’t have, it’s much easier to get ahead.
If you had to recommend a book on budgeting for people to read, where would you direct them?
To be honest, I would probably refer them to the internet. There are some fabulous websites designed to get people started on budgeting, with online tools and calculators to help. Start at http://www.understandingmoney.gov.au
Do you have any non-credit card budgeting tips for our readers?
The best tool for budgeting is honesty. You have to be honest with yourself about what you spend. You need to take out 12 months of bills and work out what your monthly electricity, water and gas bills will be. As for your daily expenses, get a notebook and write down everything you spend for two weeks. It gives you the answer to that eternal question, “Where does my money go?”
When the GFC hit the world did you notice a change in people’s habits and if so what were they and have they changed or do you think they have gone back to pre-GFC?
News.com.au reported last week that Australians owe $49.3 billion on credit cards – an average of $3,321 per credit card holder. That’s up from the $3,200 it was when I wrote my book in 2009. Experts say part of this is due to the rising cost of living – we’re putting more everyday expenses on our credit cards. It is important to remember that credit cards are one of the most expensive ways to borrow money.
You talk about compound interest in the book. But why is it so important?
For most of us, the compound interest formula was something we learned in high school math and promptly forgot. But it is important. With compound interest, the amount on your credit card is calculated on both the principal owed (for example, $1,000) and the interest ($150, assuming a 15 percent interest rate). If you don’t pay off your credit card in full each month, you’ll be charged interest on top of the interest. And it is calculated monthly. This is called the compounding effect, and it means that the amount you owe just keeps growing. After two years, assuming the above bill, you’ll owe $1,347.35 on that card—which means your debt has grown by more than a third!
Is there anything else you didn’t get to include in the book that you wish you had?
No, I was quite happy. I think I did a lot on the subject of credit card repayments!
Thank you so much Allison, you have been very helpful.
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