Never before has it been more important to understand how your credit card works and how the interest rate is calculated. If you don’t, it could cost you big time. It astonishes me how many people are throwing money down the drain because they simply don’t understand how their credit card works.
Years ago, banks used to justify their high credit card interest rates on the fact that balances are unsecured and they were losing money on them. But they can’t use that excuse anymore. History shows the average Australian rarely defaults on outstanding balances and bank annual reports show credit cards are now a big profit earner.
And yet inflated interest rates and underhand tactics to hike effective interest rates unfortunately remain the norm. In the face of sly manoeuvres from the lenders, being informed from the outset can help keep your credit costs under control. Like any product, credit cards vary greatly, so we all need to make sure we choose one which suits our financial personality and situation.
People generally use credit cards for one of two reasons. Either they use the plastic purely as a convenient payment mechanism with the debt usually paid off when the monthly statement arrives, or they are used as a credit facility to fund purchases which usually means a continuing outstanding balance.
No matter what your spending pattern is like, there are certain qualities inherent to all credit cards that you need to be aware of.
To enlighten, or remind, you of what to look out for and what to weigh up, let’s look at some of the tricks to watch out for, and then some handy tips for finding the right card for you.
3 tricks you need to look out for.
1. Backdated Interest
If you pay your credit card bill late or don’t pay it in full most companies will charge you daily interest from the date of your original transactions. So if you are just one day late paying your bill you could be charged daily interest on all transactions up to 55 days ago.
St.George Vertigo Credit Card
A great low rate credit card with no annual fee in the first year, 55 days interest free on purchases and a 6 month balance transfer.
Bankwest Breeze Classic Credit Card
Great offer from Bankwest with 0% on purchases for 4 months and 0% p.a. on balance transfer for 6 months which reverts to the very low rate of 11.99% p.a.
2. No Benefit for Partial Repayments
Most companies don’t give you any credit for paying off part of your bill on time. They will still backdate interest on the full amount of your purchases. So just say you paid $900 of a $1000 credit card bill, you would still be charged interest on the entire $1000.
3. No Interest-Free Period for New Transactions
If you don’t pay your credit card bill in full and on time you can kiss your next interest-free period goodbye. Most credit card providers will charge you interest on new purchases, instead of giving you a 55-day interest-free period, until you pay off your debt in full.
The Big 4 banks are particularly sneaky with these tricks but get away with it because most people don’t understand how their credit card interest is calculated and don’t pay much attention.
To choose the right credit card, the interest rate has to be weighed up with any annual fee and the conditions attached to any interest-free period that might apply.
Then there are the increasing numbers of extras attached to credit card accounts as banks vie for your business in a more competitive credit card market. Since deregulation of the credit card market, most banks have come out with a range of different credit cards with varying rates and conditions.
As a result two cards from the same bank may have entirely different sets of fine print. This is where choosing a card becomes tricky. However, if you can find your way through the plastic jungle the benefits can mean minimising the cost of using credit while making the most of its convenience.
Just like you choose a car or a home to meet your specific needs, you also need to find a credit card to suit your lifestyle. The problem is most consumers don’t understand the differences and how they apply to their circumstances.
Taking the time to shop around to find your ideal credit card should save you in interest or fees, preferably both. To help guide you through the selection process, here are five tips to take note of.
1. Know Your Spending Pattern
If you know you will not be able to pay back your debt in the prescribed interest-free period, you would be better off applying for a card without an interest-free period as they normally carry lower interest rates. Similarly, if you’re a prudent payer, find one with an interest free period and take advantage of it.
2. Weigh Up the Features
Look at the features on offer and match them with your financial plan. It might be the ability to reduce your debt quickly and easily through a balance transfer, avoid fees or take advantage of the rewards program on offer. Each feature has a cost so make sure you’re able to get the benefit out of it by matching a card with your spending patterns.
3. Price the Loyalty Program
Ensure you look into the real cost of the loyalty program. Cards with low interest rates often charge hefty fees for their loyalty programs and it might work out cheaper to just buy the product you’re earning points for.
4. Read the Fine Print
When you’ve found a credit card that will work for you, take time to read the fine print so you don’t get caught out by extra charges. I know, who wants to read a 24-page booklet on terms and conditions? But the thing is it’s those terms and conditions that will tell you whether you are getting a good deal or a credit card that could cost the earth.While you’re at it, dig out the terms and conditions booklet for any existing cards and read them too. You might be getting seriously slugged already.
5. Limit Yourself
Ignore the draw of a big limit and letters from your bank congratulating you on qualifying for a higher limit card. Choose a conservative credit limit and stick to it. Often these smaller, ‘introductory’ cards will cut an enticing deal, and also you won’t be tempted to spend more than you can afford to.
When it comes to credit cards the key is to be smart about how you use it. But knowing the differences between different cards can go a long way to helping you avoid getting ripped off and paying the earth when you don’t need to.
David ‘Kochie’ Koch is one of Australia’s to 50 most trusted personalities. Following his early career as an accountancy and economics journalist Kochie became co-host of channel 7’s hit breakfast show, Sunrise, in 2001.
Along with various Channel 7 commitments Kochie (with wife Libby) writes a weekly personal finance contribution for the Your Money section of News Limited newspapers. He is also a columnist with New Idea.
Kochie hosts his own segment on Sunrise – Kochie’s Angels and discusses all sorts of life matters apart from his tv and radio financial commentary. He has also published a number of books and ebooks, on his own 
Tiberio D'Orazio
December 28th, 2012 at 12:33pm
a while ago you were able to transfer a personal loan to a low interest credit card (Citibank). Are these offers still available
Roland
January 7th, 2013 at 11:02am
Hi Tiberio, great question. Citibank still allows you to transfer the balance of a personal loan account onto a credit card, and you can see the other types of accounts they allow here: http://www.citibank.com.au/aus/credit_cards/balance_transfers.htm This includes lines of credit and store cards too. Most banks to allow you to transfer a personal loan or account balance to a balance transfer credit card, but there is a catch! Whatever balance you transfer, especially if it is for the life of the loan (which can be the case, and appeals to many people with a loan balance) you will not be able to pay off any new purchases before you have paid the transfer amount in full.
Essentially, while a credit balance transfer can look like a great low rate loan option, you need to be extremely careful and make sure you won’t need to use the card for any purchases before you have paid off the transfer in full. Any purchases will attract the much higher interest rate and this will accrue on the balance, which will quickly cancel out what you save on the lower interest rate.
Hopefully that makes sense, but if you have any further questions please don’t hesitate to get in touch via e-mail to editor@creditworld.com.au and you might want to take a look at other credit cards with balance transfer or introductory purchase offers on our table, where there’s much more information on what is included: http://www.creditcard.com.au/low-balance-transfer-credit-cards/
Don’t forget to keep up to date with our blog, and you can always reach us on facebook or twitter (@MyCreditCardAU) or Google+
Chris
December 3rd, 2012 at 1:15pm
Some good tips Kochie, but that youtube clip from America holds little relevance in our market.