Credit Cards = DEBT Cards

Crown Money where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to Crown Money Podcast. My name is Jessie Edge, finance broker and head of people and projects here at Crown Money and I'm joined by CEO and money guru Scott Parry.

Morning.

How are you going today?

Tremendous.

Okay, fantastic. Well, this episode is going to be all about credit cards. Literally.

Favourite, I would have to say that I am Australia's leading plastic surgeon. I've got more credit cards than you've had hot dinners.

Fantastic. So I mean, I'm going to jump right in and ask the question, why are credit cards bad?

Credit cards are bad. I have heard them referred to as debt cards, which I think is a really strong analogy. I mean they are debt cards. I mean we are now at that position where people don't feel that bad with credit card debt. It's the norm.

It is the norm. Absolutely.

And so from here it's crept into our society where back in our grandparents day there was no such thing as credit cards. People, if they didn't have the cash, they didn't buy it. So what credit cards have allowed us to do is really start accessing money that we don't have and living beyond our means and spending more than what we're earning. And as a result, no matter what you're doing financially, if you're spending more than what you're earning, then you're going to be going backwards.

We get this question a lot. But what about the points? What about frequent flyer?

Yeah, the points back in anset days were pretty healthy. I mean those were when they first started, quite rewarding. Now they've been watered down so much to the point where you've really got to spend $300,000 to get a free kettle. Slight exaggeration.

We also have a lot of clients that will say that they pay the credit card off every month and they don't. So why is it bad?

Interesting stats. So the Australian Bureau of Statistics came out and said that 1/3 of Australians think they're paying interest on their credit card. But actually 2/3 of Australians are paying interest on their credit card. So you've got one third of Australians out there thinking, no, I'm good, I'm not paying any interest, when in actual fact they are. So what? It's not really about the interest that you are being charged. It's really about the behavioral psychology behind the spending on a credit card. And so when you are using a credit card to spend, your psychology is different. Your mindset is different compared to that of cash. And so a prime example of that is when you walk into a Myer store, for example, and you've got your Visa debit card, you've got $620 there to last you till Monday. Your mindset is, I've got $620. What do I need? When you're walking in with a credit card, your mindset is, I'm not at my limit. I can afford this. And just because you're not at your limit doesn't mean you can afford this. And so the studies are coming back saying that we are spending, on average, 18% more every single time we use credit over cash. Especially when you're doing your grocery shopping every weekend at Coles or Woolworths. And every single weekend, you're spending 18% more just because you're using that credit. And you're spending unconsciously as opposed to consciously with cash.

And that's actually on the lower end of the scale.

There's a.

There's a bit of research out of America regarding this. So one of the big American studies, they had participants, like, bidding on baseball tickets. Half of them could pay with cash, half of them could pay with credit card. And those that could pay by credit card were willing to pay 83% more than those paying with cash. And there's another study that revealed that customers are willing to tip 13% more if they're paying by credit card than those paying in cash. And another one, again by McDonald's, where their average transactions increased by 47% when they started taking credit card payment.

I mean, the stats don't lie.

No. And there's an actual name for the phenomenon. It's called the credit card premium. So fascinating thing that you are actually spending more when you pay on credit card than you are if you're paying with your own money, with your own cash.

Yeah. You're spending at a different psychological level. You're behaving differently. I mean, the scalping of those tickets, paying what was 80, 83% more. That's huge.

Yeah.

Same ticket.

Yeah.

Just I'm paying with credit. It's not my money. It's not real. Doesn't what the banks have done so beautifully. I've got to take my hat off to these guys is they've actually delinked the feeling of us spending. And so back in our day, we used to obviously not have no cred cards. And it was a credit card. We used to have checks and have to sign for it, and then we used to have to sign for the credit card, remember? Then from there we bought in the pin and I was, oh, geez, this pin's a bit of a pain in the butt. You get cranky, had to put in your pin and now it's at a point where there's wearables where they, we just tap our ring or we tap our phone and there is no sort of transaction. Our brain that feels that we've just spent money.

Yeah, you're delaying the pain.

Delinked it. And so they've so cleverly delinked our spending so we actually don't feel like we're losing money when we're spending on our credit card or using our phone for the pay waves. And as a result, we're just spending more because there's no pain associated. So they rigged up people on these ECG brain wave machines and I sent them shopping, and I sent them shopping with a credit card and there was very little pain registered in the brain receptors. Then they sent them shopping with a Visa debit card. A slight uptick in the brain receptors on the pain level. But then I sent them and I had to hand over cash when they actually shopped. And as a result, when they handed over that cash, there was a pain receptor that was stimulated because of that feeling of losing that cash or handing over that cash. And so we at Crown All About Cash, cash is king. All of our clients are set up on a cash diet. That means no credit cards. Cash based system like the old days where it's impossible for you to spend more than what you earn if you only spend in cash.

Absolutely. So I mean, another thing that pops up with our clients when we cut off their credit cards, it is a pretty scary thing for them. Quite emotional, it's almost like taking away a limb or something. But a lot of them will say, what if there's an emergency?

The cutting up of credit cards is fascinating. I mean, I've got a whole wall in my office of all these credit cards from all my clients that I've been able to cut up. And it's, it's a little bit of a fetish, to be honest. But it's weird.

It is weird.

I mean, some people like sucking toes. I'm more of a credit card sort of guy. So where it sits is when you're cutting up the credit card, it's very important for the person whose credit card it is to actually cut it up. So I don't actually ever cut up. It's more of a psychological thing of just cutting through that you got Some.

Very big scissors as well.

I did. They got confiscated at the airport. I forgot to take them out on a carry. And so what happens is that these people, when they cut up their credit cards, I video them and their reactions range so dramatically from giggling like a little school girl to shaking and trembling with fear because they feel like they've lost their safety net. Credit cards aren't safety nets. They're financial quicksand. Once you're stuck in there, very difficult to get back out. So, yeah, for those people who are using the credit cards and haven't cut it up yet, I just say, try 90 day challenge. Just try for 90 days, not using a credit card and see how you shop differently. More importantly, when you go grocery shopping on the weekend or whenever you do that, just take what you estimate your groceries going to be in cash, $200, leave all your cards at home and just go shopping. The $2 in cash. And you watch how differently you shop, you're actually thinking about what you can actually buy combine. That's called conscious spending.

It's an incredible exercise and it really changes the way they shop. Like, they're genuinely like, I don't need this.

Conscious.

Yeah, amazing. So what if there's an emergency?

Yeah. So that is the old chestnut in the top drawer, I believe, having a float or emergency fund in the house. So we usually set our clients up with at least $500 to $1000 cash in the house at all times. So that no matter what happens on a weekend, if Jimbo the dog got skittled by a car and he needs to go to the vet, then you've got the money there for the vet. Or anything of those sort of really rare emergencies. They can be covered by having a float of cash. I usually tell clients, put it in a book, in a bookcase, or in their top drawer when a pizza man comes to the front door on a Friday night, it's not an emergency.

Do not use that cash.

It's not what it's there for.

Absolutely.

These days you don't actually pay cash for pizzas on a Friday night. No, you're literally not loan.

And that is the beauty of Visa debit cards as well. A lot of people used to argue that, oh, no, I need the facility of a credit card to be able to purchase things online. But everybody's got a Visa debit now. Everybody's got a card with digits that they can enter online. If they're purchasing those sort of things that are attached to their transactional account that has their money sitting in it. And this, the what we're talking about, this phenomenon known as the credit card premium that actually comes into effect with things like afterpay and zip pay and all these sort of things as well. The ability to buy things using somebody else's or using money you don't have, that changes your psychology of spending. That's why all of those sort of features are sort of, you know, pay now, pay later, buy now, pay later, whatever it's called. They're super dangerous because you're buying more than you really should be. You shouldn't be buying this. Like, if you've got the money, then you can buy it, but you can't otherwise for sure.

I heard a really good saying about cars and buying cars and the whole like, what can I afford? What can I afford? And really sort of the rule of thumb is if you can't afford to buy two of those cars, then you can't afford it. Wow. And so it's something where it's like, I can. Most people just stretch themselves right to the eyeballs on one car. But if you can't afford two of those exact same cars and you can't afford. And that's a really good rule of thumb for cars, which is a totally different subject. But, yeah, I think these credit cards are the biggest hole in most people's bucket where there's draining cash flow. The saddest part I see is when I've come across clients where they might have three, four, five credit cards, I don't ask what the balance are, I simply ask, what's the limit? Because that's what the balances are. It's never about, oh, yeah, I've got $1,000 owing on a 20 grand credit card. I've got 19 half grand owing on a 20 grand Credit Card. And so where you're sitting is it's very difficult to pay that debt off because the interest costs are so high. You're throwing 3, 4, $500 a month at it, but it's not coming off the debt, it's just going to interest.

And a lot of people don't realise, like when we process home loan applications, the credit cards that you have, that affects your ability to get finance. Like, it changes. Like, the lender will look at that credit card. A, they will always take the entire limit into account when they service. Like they look at your ability to service a loan. But B, they will go through transaction by transaction and they will see where you're spending your money. And if they think that you're spending too Much money for your income level, which clearly you are. If you're using credit cards, then they can actually decline your deal because of it. So credit cards are not good. They're not good things. Especially if you're trying to buy a home or refinance or whatever it may be.

And especially if you got interest at 16% of them. I mean, you got to think of it from a bank's perspective. Put your bank hat on. If you're the bank and you've got a product that you make 16% on, I'm throwing it down everyone's throats. Get some more of this. Get some more of. That's the most profitable part of the business.

I remember the day I turned 18, I got a letter from Commonwealth bank from after my little Dolomite account, I got a letter from Commonwealth bank saying, you have been pre approved for a credit card. And I think the limit was like two grand, three grand to an 18 year old. You're like, oh, well, everyone has a credit card. This is a bit of a rite of passage. I better get one. And then you just start that, that downward slide into debt. Like it was just crazy. I remember receiving another letter, it would have been maybe five, 10 years ago. And they said, oh, you've been pre approved for credit card. And it was like a $10,000 limit or something. My God. I went off at the people, I called them up and I absolutely went to town them and said, do you guys realize what you're doing? This is completely unacceptable. I did not ask for this. You guys are perpetuating the cycle of debt in this country. So yeah, the poor customer service. I was like not aiming this at you directly, but you're gonna cop the brunt of it.

So yeah, it's sad. It sunk so many marriages, it's broken up so many families. I mean, I don't think people would take into account the ripple effect of credit card debt. And that is the stress creates on not only the person with the credit card debt. I mean, there are some couples out there where the partner will have a secret nine, two, three or four credit cards.

How many applications have we said? How many clients have we seen? And one of them has pulled us aside and said, oh, just letting you know, I've actually got another credit card. Please don't tell my wife or please don't tell my husband. Like that is scary and kind of.

Sad and the norm. Yeah, it's not like freakish.

Yeah.

So it's a sad thing that they don't, they're so embarrassed by it. And they're so caught up by that they have the credit card debt, they've had to hide it from their partner.

Yeah.

And so one day, eventually they find out and then the trust issues that come in and you've got, you've got to realize that because of one credit card debt, there are kids out there who are growing up in two broken or separate households where the mum and the dad have separated because of the financial stress of a credit card debt. That is this unbelievably crazy thought that a child is losing out on having both his parents together because a credit card debt caused them to basically have financial stress.

And I think you touched on it before as well. It's the norm. A credit card debt is the norm in Australia. Like everybody has a credit card. What's the stats? I can't remember.

4400 is what the average Australian family or Australian owes.

4400 on their credit card. And that's scary that that has become such a part of our culture that it's acceptable to be spending beyond your means. That you know, we're paying so much money to the banks in interest. Like this is why they make so much profit. Like, and it's disgusting. Like we just shouldn't have credit cards. They shouldn't exist.

Yeah. They make billions of dollars in interest just on credit card debt. So it's something where, as I said, it's the most profitable product for the bank. They're throwing it out there, hoping. I mean they have been clamped little bit lately where now they've been basically banned from giving people just limit increases. Limit increases. No one ever says no to a limit increase. That was, oh, just in case. And next minute the banks know people's behavior and they just continue to increase that debt level, increase the interest payments and it's very tough to unwind.

Yeah. So what do you suggest for a client that has quite a bit of outstanding credit card debt, like, what are the steps? What do you do?

So many options. I'll go through probably my top three depending on your situation. Everyone's different. Some people do have home loans, some people are renting. So the first step is if for whatever reason you're renting or you do have a home loan, I try and do a balance transfer. So I go on to finder.com look at balance transfers today. You can get a 2 year 0% balance transfer, which basically means they refinance your credit card debt over to this new credit card company. The bank will then give you a New credit card. Do not ever use that new credit card. That's the secret, that's the fine print. So you chop that new credit card up as soon as you receive it and then from there you've got a balance transfer. You're paying 0% interest on a 5, 10, 15, $20,000 credit card debt for two years.

And make sure you cut up the old credit card as well, for sure.

So it's very important to cut up all credit cards. I think you're getting the credit cards are bad. So that's. Balance transfer is a really great way to basically save 16% interest daily.

And it's important to note that the reason that banks will offer a balance transfer because they know once they get you in, you are highly likely to continue spending on their credit card. And that's where they're going to make money off you. And that's why in order to beat the banks, you need to cut up that new credit card as well.

If you spend on a new credit card with a balance transfer, whatever expenses you put on that go to 16% instantly and you can't actually pay that new purchase off until you've cleared your balance transfer. That's the trap.

Yeah.

Second thing I'd be doing is I'd obviously look at a potential refinance or a debt consolidation. Get everything under one roof, get it onto mortgage rates. I mean, I think we, we're going to be seeing another rate reduction tomorrow. And as a result of that, if you can have your credit card interest down at 3ish percent rather than 16% and you can get your income working for you on that debt, that means you can clear a lot faster and you're paying as much interest. So that'd be probably the second option. The third option is probably a debt snowball. And so these are really effective for people who don't have equity or maybe renting. And we basically look at all other debts you've got and really just focus all energy on one debt at a time, put all your repayments onto the one debt, pay minimum payments on everything else. And then once that one debt's been paid off, you get that large repayment and you put onto the next highest debt and you continue to snowball the repayments.

Yeah, and there are a couple of options in regards to which way you rank those debts. So you might want to choose to pay the smallest debt first. Clear that out of your life just so you get that quick win. And it is about the psychology as well. Alternatively, you might choose to pay the Debt with the highest interest rate off first, which is the more logical choice and basically getting that out of the way. So you're just freeing up as much income as possible to put towards your other debts. And the debt snowball is hugely effective. It makes you focus your priorities and just go, okay, I'm going to focus on one debt at a time. Get out of my life. And it is really rewarding as well. Being able to just clear a debt and just, you know, that feeling of relief when you've paid off one of your debts and then eventually when you've paid off all of your debts is just incredible and amazing.

Yeah. I think that comes under the heading financial progress equals happiness.

Yeah.

And I just feel so.

Which is so true. A lot of people don't, don't understand, like, financial or progress in general equals happiness. As long as you are moving forward and as long as you can see a light at the end of the tunnel, that's what makes humans happy.

Yeah. I think so many people frustrated, they're working their guts out. They can't work any harder. You know, they're earning more money than they've ever earned in their whole life, yet they don't seem to have any money left at the end of the month. And so they're saying, hang on a second, I can't earn any more money. I don't have any money left. I'm earning more money than what I've ever earned. What can I do? I'm trapped.

Yeah. And we see so many clients with incredible incomes and yet still have so much personal debt, so many credit cards, car loans, like all this sort of stuff going on. You're like, wow, like even that even earning that much money, you are still spending beyond your means.

I've got some great stories over the last 16 years. So I've got an accountant, $230,000 in credit card debt. It's an accountant. Imagine your accountant sitting there with $230,000 in credit card debt. It's crazy how much weight people put on accountants and how important they are or how trusted they are. When you've got this accountant who's got $230,000 in credit card debt, you're thinking, you should know what you're doing with your money. And it's kind of like the panel beater with a beaten up car. Just because they're good at accounting doesn't mean they're good at managing money. It's a very different thing. Or I used to think if you're good at earning money, you must be good at managing. It's actually the opposite. My highest earning clients are my most effective on the program of the money management because they actually have got great incomes, they've got a great mindset, want to get ahead financially. They just don't have the right structure. Tools and tools. We plug them into the right structure, give them the right tools, and then they start flying. I've got a client who owns $25,000 a month net. $25,000 a month net, that's after tax. They spend $25,000 a month and have a $7,000 credit card debt and their home loans on interest only.

Oh, my God.

How can you be spending 25 grand a month?

There'd be a lot of fun to be around.

They would be heaps of fun. They definitely would be heaps of fun. It's just crazy. 25 grand a month net spent, plus 7 grand credit card debt. If I had told them 10 years ago, you're gonna be banking 25 grand a month, month in the hand after tax, and you're still going to have credit card debt and no savings and your home loans on interest only. No, that can't be.

That can't be possible. Yeah, but it's true, because people spend what they have access to. We always do. We just can't help ourselves.

The access. Yeah, cut the problem, literally.

That's some great information about credit cards. We're going to chat now about a particular client case study. So obviously we've seen thousands of clients and it's great for people to actually hear what other people are doing, like what their situation was to start with, what we advise them to do, or how we restructured their financial situation and how they're doing because of it.

All right, okay, so this client here had about five credit cards, few personal loans as well. I mean, proper debt junkie. So had a Westpac credit card for 4 grand, a Bank of Melbourne credit card for 5 grand, another bank of Melbourne credit card for 5 Grand, just in case we need the extra 5. A Citibank, Qantas Visa card for 12.

Grand because of the points.

Yeah, of course. Great deal. And an ANZ for 14 grand. So total credit card debt, $30,000. The repayments on that, in terms of what they were paying was purely interest. It didn't really sort of come off the principle. They're paying $250 a week. So $1,000 a month. You literally could have an investment property for that same cost.

Incredible.

And so from there, we're able to take all the cards out have one debt, one repayment. No credit cards, just a Visa debit card. And we're able to get that down from $250 per week to close to 250amonth.

Yeah. That's incredible. And how did they feel?

Light. Like it's something where when you're seeing people with a lot of credit card debt, they sort of look really like a sucked lemon. Yeah, they have. The stress, you can see, is just eating them up. Inside is that sick feeling in the stomach, the weight on the shoulders. How am I going to get out of this? I'm trapped. And so just being able to give people that lightness back, like, oh, my God. Okay, now I can actually move forward. I can actually get out of this trap. So all this financial quicksand.

Yeah, absolutely. All right, well, I think that's enough on credit cards for one day. Great information. Thank you, Scott. Thank you so much. I think everybody. Everybody should take this information on board, because nearly everybody we know has credit cards. A lot of people will defend their credit cards, which is really sad as well. But as we've discussed today, they are financial quicksand. There are so many dangers to them. Not just the interest that you're paying. It's all about the psychology of your spending. And so if you can cut up your credit cards, one of the best things you can do, and if you want to, feel free to send them in to us and we'll put them up on our credit card wall.

Yeah. And just those two exercises, two takeaways. One experiment. Go shopping this week with just cash, no cards whatsoever, and just watch yourself. The other one is to also have a look at just trying to do 90 days without a credit card. Just trial it three months, put it.

In the top drawer. For now, just give it a go.

Yep.

Awesome. Thank you, Scott.

Bonsoir.