In 2020, two of the nation’s largest banks announced the release of an interest free credit card. Then, NAB launched its interest free StraightUp Credit Card in an Australian first. Less than 24 hours later, CommBank announced its own version, Neo, a card very similar to NAB’s offering, which would become available to users later in the year.
While spokespeople for both Westpac and ANZ confirmed neither plans to launch an interest free credit card of its own, it seems this effort to create a new offering could signal a change in the world of credit cards here in Australia. But, is it a change for the better?
Over recent months, both the number of credit cards in circulation and the overall amount owing has plummeted, as cardholders pay down their debt and cancel their cards in the wake of pandemic-induced financial uncertainty. Who wants to be stuck with high interest debt when their future remains so unsure, after all?
And while credit card numbers have declined, the popularity of buy-now-pay-later (BNPL) services has skyrocketed. Moving away from traditional forms of credit, users are instead opting to pay with the likes of Afterpay, spreading their spending over fortnightly payments, with no interest – and often no fees – to worry about.
It’s perhaps no surprise then that both NAB and CommBank chose to release their own interest free products, as they attempt to entice users back to credit cards with the promise of interest free spending. But, how do they stack up? Are these cards really a match for mighty BNPL players such as Afterpay and Zip? Let’s find out.
No Annual Fee
Pay no interest or late payment fees – just a simple monthly fee.
With a standard credit card, you typically pay an annual fee every year for the use of the card, although there is a small number of no annual fee cards out there. As a lending product, credit cards also charge interest at a rate decided by the provider. While the average interest rate on cards here in Australia is around 17% p.a., it can range from 9% p.a. to 22% p.a., depending on the type of card in question.
Moving away from this traditional format, both NAB’s StraightUp card and CommBank’s Neo card eschew annual fees and interest, and instead charge a flat monthly fee that varies according to the cardholder’s credit limit.
With NAB’s StraightUp card, monthly fees are $10 for cardholders with a $1,000 credit limit, $15 for cardholders with a $2,000 credit limit, and $20 for cardholders with a $3,000 credit limit. Meanwhile, CommBank Neo’s monthly fees are $12 on a $1,000 credit limit, $18 on a $2,000 credit limit, and $22 on a $3,000 credit limit.
In terms of repayments, neither bank charges late fees. With the StraightUp card, minimum repayment amounts depend on cardholder credit limits, so those who have a credit limit of $1,000 must pay a minimum of $35 a month, those with a credit limit of $2,000 must pay a minimum of $75 a month, and those with a credit limit of $3,000 must pay a minimum of $110 a month.
Over at CommBank, Neo cardholders must pay a minimum monthly repayment of $25 or 2% of the balance, whichever is greater.
Similar to some BNPL providers, both cards work on a ‘no use, no pay’ basis. That means, each month cardholders don’t use their card, they will pay no monthly fee – as long as their balance is also at zero.
Another standout feature on these new interest free credit cards is their lack of foreign currency fees. Unlike most other credit cards, both the StraightUp card and the Neo card do not charge a fee on transactions made in a foreign currency, helping cardholders save money when travelling overseas or shopping online with international retailers.
Days before NAB launched its StraightUp card, the Reserve Bank of Australia (RBA) released data highlighting the recent trend of declining credit card use in Australia. According to the data, Aussies paid down $750 million in July, bringing the total amount of credit card debt incurring interest to $22.48 billion.
During the four months to July, the total decline in balances accruing interest was $5.7 billion. This is in stark contrast to the eight months prior to that (August 2019 to March 2020), which only saw a reduction of $2.3 billion. Other reports suggest much of Australians’ superannuation early release money was used to help clear that debt.
As for the number of transactions made using credit cards, these also declined significantly, falling from around 258 million in February to 238 million in July, with the value of those transactions decreasing from $28.7 billion to $24.2 billion during the same period.
Unsurprisingly, the number of credit cards in operation also saw a downward trend, presumably as cardholders either paid off their cards and closed them, or chose to cancel them in favour of other payment options. In July, there were 130,524 fewer credit card accounts than the previous month, and 1.75 million less than in July 2019.
Meanwhile, interest in BNPL has surged. In June, Afterpay boasted 9.9 million customers, after seeing a 116% increase year-on-year. This included 5.6 million customers in the United States and 1 million customers in the United Kingdom, with remaining customers in the more mature Australian and New Zealand markets.
As Afterpay’s biggest Australian competitor, Zip also enjoyed significant growth, reporting a 63% increase over the same period, bringing its total to 2.1 million customers. Meanwhile, newer player Splitit, which allows customers to split payments into interest free monthly installments on existing credit or debit cards, reported a 85% increase, bringing its total to 309,000 users.
With that in mind then, it’s easy to see why two of Australia’s biggest banks decided to branch out, creating what could perhaps be described as a hybrid between a traditional credit card and BNPL. In this hybrid, you would expect its creators to have combined the best of both options, to allow it to appeal to a market that seems to have grown tired of traditional payment solutions.
The question is, has either StraightUp or Neo managed that – and do these cards have something better to offer than what has come before?
To determine whether or not these two interest free credit cards are as good as they sound, we need to look at who they might work well for. Yes, they are aimed at the younger market who tend towards BNPL, but that doesn’t mean they will suit the needs of every user – both within that market and out of it.
Both cards charge a monthly fee dependent on credit limit, with no fee charged during months the card is not in use and the balance is at zero. Cardholders who only use the card for large purchases – and pay off that spending quickly – may get good value from the card. On the other hand, those who use the card every month could face a substantial amount in monthly fees. If you had a $3,000 credit limit on the Neo card and used it every month, your total fees would come to $264.
For that reason, the card may work well for cardholders who like to keep a credit card for emergencies. For those users, the card is there when they need it, allowing them access to credit for unexpected expenses. When the card is not in use and the balance is at zero, it costs them nothing.
With credit limits set at $1,000, $2,000 and $3,000, these cards may also suit those who are new to credit, or those who want to limit their opportunity to get into debt. Traditional credit cards can offer credit limits into tens of thousands of dollars – dependent on cardholder circumstances – which could tempt some cardholders to spend more than they would otherwise.
There can also be a certain amount of unpredictability when dealing with traditional credit cards, with minimum repayments set at a percentage of the closing balance. NAB’s StraightUp card aims to address this, by putting in place a set minimum payment determined by the cardholder’s credit limit.
While the bank encourages cardholders to pay as much as they can each month, it says its card takes the uncertainty out of repayments. “A lot of young customers don’t have credit cards because they don’t like the unpredictability of them,” said NAB’s group executive for personal banking, Rachel Slade.
“This addresses the things that make them cautious. Customers want certainty and predictability of repayment. It’s got no surprises.”
One of the best ways to work out whether one of these interest free credit cards would work for you would be to think about how you might use it – and then calculate how much you would pay out on an interest free credit card, compared to a traditional credit card or BNPL.
Zoe has a $1,000 credit limit on her CommBank Neo card. She uses the card to pay for a $100 pair of jeans, and then makes the minimum repayment of $25 each month for four months to pay off that purchase. Paying $12 per month in monthly fees means she has paid back $148 on that purchase.
If Zoe had a CommBank Low Fee credit card with purchase rate of 19.74% p.a. and an annual fee of $29, paying off $25 per month would result in her paying out around $4 in interest, plus one third of card’s annual fee, at about $10. This brings the total repaid to $114.
Using Afterpay, Zoe would have to pay off that $100 purchase in six weeks, rather than four months ($25 at the time of purchase, then $25 fortnightly). However, doing so would mean paying no interest and no fees (as long as she made each repayment on time). The total repaid in this case is $100, but over a shorter period of time.
Samira has a $1,000 credit limit on her NAB StraightUp card. She buys a TV for $1,000 and pays it off over six months at $167 per month (plus $10 per month in fees). Samira pays $1,060 in total for this purchase.
If Samira used a CommBank Low Fee credit card, paying off $180 per month to clear the debt within six months, she would pay approximately $57 in interest, plus half of the annual fee at around $15. This would bring the total to $1072.
Using Zip, Samira would pay $167 per month to pay off her $1,000 purchase within six months. She would pay no interest, but would pay $6 per month in fees. This creates a total of $1,036.
Graham uses his CommBank Neo card to cover a $3,000 lounge set, and then pays $250 per month to pay off the purchase in 12 months. He pays $264 in monthly fees, to pay back a total of $3,264.
Using a CommBank Low Fee credit card, Graham would pay $280 per month to clear his debt in 12 months. During that time, he would pay approximately $328 in interest, and $29 in annual fees, bringing his total to $3,357.
If Graham opted for a CommBank Low Rate credit card, with a purchase rate of 13.24% p.a. and an annual fee of $59, he would pay approximately $211 in interest, bringing the total repaid to $3,270.
Using Zip Money, Graham would pay $280 per month to pay off his $3,000 purchase in 12 months. With the first three months interest free, Graham would pay approximately $169 in interest over the remaining nine months. He would pay $72 in monthly fees, bringing the total to $3,241.
Of course, while each example offers a pretty obvious winner in terms of cost, there are other variables and conditions to take into account, such as additional spending and how much each user could potentially afford to pay back each month.
For that reason, it’s a good idea to do your own calculations that take into account your spending and repayment habits when working out which option is not only the most cost effective, but the most suitable for your needs.
So then, you’re considering applying for an interest free credit card. Which one should you choose? Let’s compare the two options to see how they measure up.
While both cards charge flat monthly fees according to the user’s credit limit, NAB’s monthly fees are lower. Choosing the StraightUp card, you would pay $10 per month in fees on a $1,000 credit limit, $15 on a $2,000 credit limit, and $20 on a $3,000 credit limit. With the CommBank Neo card, your monthly fees would be $12 on a $1,000 credit limit, $18 on a $2,000 credit limit, and $22 on a $3,000 credit limit.
Both cards have a no use, no pay feature, which means you pay no monthly fees each month you don’t use the card and your balance remains at zero.
Neither card charges interest, late fees or foreign currency fees.
CommBank’s Neo requires a minimum monthly repayment of $25 or 2% of the closing balance, whichever is greater. With the StraightUp card, you would have a minimum monthly repayment of $35 a month on a credit limit of $1,000, $75 on a credit limit of $2,000, and $110 on a credit limit of $3,000, essentially encouraging you to pay off your debt faster.
Neither card allows users to earn traditional rewards on a points-based program. However, CommBank’s Neo provides eligible users access to CommBank Rewards, which offers cashback of up to $15 when spending at around 80+ approved retailers. (To be eligible, customers must be older than 21, not be in hardship, and not have default on another CBA product.)
Neither card allows balance transfers or cash advance transactions.
Both cards have set credit limits at $1,000, $2,000 and $3,000.
How does that compare to traditional credit cards? Creating a comparison between these new interest free credit cards and traditional credit cards is somewhat tricky, as there are so many different types of credit card out there. This, of course, is one of the most appealing aspects of the traditional credit card: if you want a credit card, you can generally find one to suit your needs.
With that being said, we can still look at the main costs and features associated with both options to see how they stack up when placed alongside one another.
With a traditional credit card, you could pay anything between $0 and $700+ in annual fees. This annual fee typically correlates with the features on offer, so if you want more, you should expect to pay more. Depending on your needs, you could pay nothing in annual fees, or hundreds – with the aim being you enjoy more in value from the features on offer than you pay out in annual fees. With an interest free card, you pay a flat monthly fee, with no fancy extras on offer – but with the opportunity to pay $0 each month you don’t use your card and your balance is zero.
Interest on traditional credit cards ranges from around 9% p.a. to 22% p.a. Interest free credit cards charge no interest. However, it’s worth weighing up whether the cost of interest plus fees on a traditional credit card would be higher or lower than the monthly fee on an interest free credit card according to how you use it.
Traditional credit cards comes with a variety of incidental fees, which you may or may not have to face. Most charge late fees and foreign currency fees, while the interest free credit cards do not.
When using a traditional credit card, you will usually be expected to pay either a flat minimum repayment – usually around $25 – or a percentage of your closing balance. This typically ranges between 2-3%. NAB’s StraightUp card has a set minimum repayment based on your credit limit, while CommBank’s Neo requires the greater of $25 or 2% of the balance.
If you want to earn rewards, there are plenty of traditional rewards credit cards to choose from, offering a wide range of rewards programs. Interest free credit cards do not allow for this type of rewards earning, but the CommBank Neo does offer limited cashback when spending at participating retailers.
Traditional credit cards can be as feature-packed as you want them to be. On higher end cards, you can enjoy extras such as airport lounge access, hotel upgrades, complimentary insurance covers and travel credit. While you will pay more in annual fees for these cards, if you pay off your balance each month – and make good use of the extras – that extra cost can be worth paying. Interest free credit cards don’t offer any extras of this kind.
For those who meet card provider eligibility criteria, traditional credit cards can offer credit limits in the tens – and even hundreds – of thousands. Credit limits on interest free cards are limited to $1,000, $2,000 and $3,000.
How you use the card will obviously affect its worth – as well as how much it costs you. To give you an idea of what we’re talking about, look at the following table comparing the cost of paying off various balances over a 12 month period. (Calculations are based on equal monthly repayments, taking into account monthly fees or interest charges as specified.)
|Credit Card Balance||Monthly Fee||Total Paid in Fees||Effective Rate||Compared to Interest on a $0 Annual Fee Card with a 15.45% p.a. Rate||Difference|
When trying to compare interest free cards with BNPL offerings, things become even trickier, as there is such a wide variety in the market. While most BNPL platforms don’t charge interest, some do, as is the case with Zip Money. Some require repayment over a specified – typically shorter – timeframe, and some charge ongoing fees, while others do not. Credit limits can also vary.
In terms of features and rewards, these are similar to what’s on offer with NAB’s StraightUp card and CommBank’s Neo card, although Afterpay is currently allowing users to earn Qantas Points in limited quantities.
If you want to compare interest free cards – or even traditional credit cards – to BNPL options, you typically need to have a certain scenario in mind.
It is worth pointing out, however, that when you apply for an interest free card, you will need to meet the card provider’s eligibility criteria. BNPL, not so much. On the other hand, you can use an interest free credit card to build your credit score by using it responsibly, which can help you to get approved for more serious credit in the future, such as a home loan.
So then, are we to see further change within the industry now that NAB and CommBank have broken new ground? It’s no secret credit cards haven’t experienced much change over the past 70 or so years since they were first introduced. However, with this step away from the traditional model, NAB and CommBank could push other providers to update their offering to appeal to a market that is increasingly shifting away from credit cards.
“Australians’ appetite for credit remains strong, but there’s a growing desire to access it in ways that enable enhanced transparency, certainty and simplicity,” Visa’s group country manager in Australia, Julian Potter, said.
We’ll just have to wait and see what card providers come up with next then. Today, there is StraightUp and Neo to consider. Tomorrow, who knows?
Disclaimer: The information contained within this post is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.
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