Paul Clitheroe
Paul Clitheroe

Households today are just trying to avoid going backward

PLENTY of Australians are doing things tough at present, with a recent report by ING DIRECT confirming that the top financial concern for almost half (47%) the nation's households is preserving - rather than improving, their current lifestyle.

In a bid to avoid sliding backwards 41% of these households plan to reduce living costs. One in three (32%) will cut back on discretionary spending - things like entertainment or dining out.

Consumer group Choice dished up similar findings in an August study, which found almost one in three respondents were struggling to get by on their current income. Worryingly, one in five (22%) of these battlers admit to deliberately running late with bills or skipping payment altogether because they were short on cash.

Unfortunately there's no magic bullet for managing a cash squeeze. Running behind with bills definitely isn't the answer though. It can mean copping a lot more than late payment fees.

Missing a bill or dragging the chain with payment is likely to be noted on your credit file. That's a record of how well you've managed bills and debt in the past, and it's something lenders look at when you apply for a loan, credit card or even to have utilities like gas and electricity connected.

If you're strapped for funds contact the bill issuer to explain your situation- many will offer a repayment plan. Or consider asking your phone or power provider if you can switch from quarterly billings to say, monthly or fortnightly bills. It can be more manageable paying smaller, regular expenses than a large lump sum.

In particular, avoid loading your credit card with bill payments especially if you know you're not going to clear the balance before interest charges apply. It can be a one-way ticket to spiraling debt.

On the topic of credit cards, I came across research recently that highlights the way our cards can gouge a hole in our finances - even when we're on top of money matters. Rewards-based cards are a noteworthy culprit, often delivering very little in the way of real value.

As a guide, comparison site Mozo crunched the numbers and found one-third of rewards cards deliver less than $20 in net rewards value each year. One in four cards are likely to see you pay more in fees than you'll earn in freebies, and some cards have such high annual fees that you need to spend more than $40,000 a year on the plastic, just to break even.

We all love the idea of getting something for nothing. However with the annual fee on rewards card averaging $161 versus $43 for a no-rewards card, it's clear there really is no such thing as a free lunch when it comes to credit cards.

Note too, the average rate on rewards cards is 19.62% compared to 14.48% for basic cards, so if you carry an ongoing card debt it's a no-brainer to skip the rewards cards altogether. You'll just be paying for any 'freebies' via inflated interest charges.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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