Card costs - understand them and save
CREDIT cards can be very handy but new research shows Australian card holders could be collectively wasting billions of dollars each year on excessive card costs.
It's not all bad news when it comes to credit cards. They eliminate the need to carry large sums of cash (though debit cards work just as well here), and some offer freebies like complimentary travel insurance. In fact these days it can be hard to make a hotel booking or restaurant reservation without providing credit card details.
But for all the convenience of credit cards, there are also plenty of misconceptions about how they work, and a simple misunderstanding could end up costing you dearly.
One of the key strategies in keeping card costs to a minimum is to match your credit card to your style of card usage. If you have an ongoing card debt that typically means picking the card with the lowest rate.
Industry research shows the 11 million Australians with an outstanding card balance are collectively paying around $4.2 billion more in interest each year than they need to simply because they aren't using one of the cheapest cards.
There are cards charging about 23%, and plenty with interest rates around 20% or in the high teens. However some of the credit unions and small mutual banks offer very competitive deals. Community First Credit Union for instance offers a Visa credit card with an ongoing rate of 9.5%.
It's also worth taking a close look at your card's fees. This can be especially important if you only keep a credit card for emergencies or if your credit limit is low. A $50 annual fee on a card with a $500 limit for instance, works out to the equivalent of 10% interest.
Annual fees tend to be a lot higher for reward-based cards, and this can be another trap for card users. In general, reward schemes pay a return equal to about 1% of annual card spending. So if you have a card with an annual fee of $100, you need to spend at least $10,000 on the card each year - around $192 weekly, to earn sufficient rewards to cover the fee. This assumes you clear the card balance each month to avoid interest charges that can go as high as 20%.
'Interest free' days are another source of card confusion. Most credit cards offer something like 55 or 44 days interest free. What many people don't realise is that interest free days only apply if the card balance is bought back to zero at the end of each statement, and this only happens if you pay off the full amount owing.
Since 1 July 2012 card issuers have been required to explain in simple terms how their interest free days work. It's a great initiative but I suspect many card users will still be bamboozled by what can be a complex system.
The bottom line is to have a clear idea of your card's interest rate if you have a card debt. Minimising the rate will save you money. If you pay off the card each month give yourself a pat on the back but do check that the annual fee is competitive. Comparison websites like Mozo make it easy to see how your card shapes up.
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. Visit www.paulsmoney.com.au for more information.