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
2. Weigh Up the Features
3. Price the Loyalty Program
4. Read the Fine Print
5. Limit Yourself
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.