Credit cards, home loans and current accounts are often treated as things that are quite different, and many people now have different credit cards from their other financial accounts. However there has been a different move recently where all the accounts are not simply provided by the same bank but they are in the same account.
This is called a current account mortgage. How would a credit card user be affected by this?
The current account mortgage aims to put all the different accounts into one pot. When taking out a current account mortgage the home owner agrees to pay in their wage or salary in to the mortgage and to secure the house as a guarantee that the mortgage will be repaid. This means that the house functions as both a transaction account and a mortgage. The account will also have full transaction account facilities and will charge daily interest.
The home owner is then encouraged to put in their credit cards, personal loans and savings accounts into this account. This will mean that the account can lower the interest on both the credit cards and the personal loans and also offer both effective higher interest rates and a more tax efficient treatment for the savings element of the account. It also benefits from the fact that the money that is deposited into the account every month is taken off the interest calculations, unlike transaction accounts where the money is usually not paid any interest. The interest tends to be a bit higher than a standard mortgage due to the transaction account features on the account.
There is a large interest saving with the credit card. This is because the amounts that are taken out on the card are unsecured, while this is secured. Most accounts give out debit cards rather than credit cards, but these are usually accepted where ever the credit cards are accepted.
However there are certain disadvantages of having the credit card account running off a current account mortgage. For a start the current account mortgage does not have an interest free grace period. This can make a large difference. If there is an average balance of $2,000 that is always paid off in full every month then this will itself set off thousands of dollars of interest over the life of the loan. This is particularly the case with employee cards.
There is also the fact that there will be no rewards from spending on the card.
It can often be a good idea to have a separate credit card that is paid off every month that will take the interest free grace period and rewards.
