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Interest in Credit Cards

Jackie Pearson is editor and executive producer of CHOICE Money & Rights magazine. CHOICE Money & Rights is a not-for-profit, independent magazine from the Australian Consumers Association. It provides unbiased, expert information on banking, investing, credit, insurance and you rights.

Over Christmas, Australians will rack up huge debts on their credit cards with little or no chance of paying them off come January.

The biggest mistake consumers make when managing their credit card is choosing the wrong card in the first place. The best way to ensure you choose the right card is to ask yourself how you intend to use it.

Do you intend to religiously pay rhe entire outstanding balance or will you have a carry over balance form month-to-month so you're likely to pay interest?

If you'll never pay interest

If you're a disciplined $0 balance person, you need to select a credit card with the lowest annual fee and reward program. Look at whether the card will provide an annual fee waiver if you spend more than a set amount each year. The interest rate is basically irrelevant because you're never going to incur an interest bill!

When card providers say they give you 55 interest-free days, they count from the last statement so make sure you compare the number of interest-free days from the statement date. Some cards only give you 10 to 14 interest-free days after the statement.

If you're likely to pay interest.

The interest rate is the most important factor. Select a card with the lowest available ongoing rate and with a low annual fee. If you have a carry-over balance, interest-free days are less important. Be wary of cards offering honeymoon rates, including the recent spate of 0% cards. Check the rate the card will revert to at the end of the special offer period. There are some excellent low-interest cards available if you shop around. If you're currently on a card with a high rate, apply for a cheaper one and then cut up the old one.

How to avoid a lifetime of credit card debt

The golden rule is to always pay more that the minimum monthly payment specified on your statement. If you only pay the minimum, depending on the size of your debt and the inteest rate you're paying, you may find it virtually impossible to ever have a zero balance.

Our recent research on a popular credit card with a reward program indicated that if you were to only pay the minimum (but not the annual fee, which gets added to your total debt) your outstanding balance will actually grow.

The best way to reduce a credit card debt is to pay as much as possible. For example is you only made the minimum monthly payment and paid all the fees against a credit card debt of $1000 with an interest rate of 18.25% and a $40 annual fee, you'll end up paying over $3000 and taking 20 years before you eventually pay off the card.

However if you pay an additional $50 per month, it will only take 19 months and total repayments of %1148. That's a huge difference!

Tips and Tricks

  • Check whether the advertising interest rate applies to all transactions or whether a higher rate applies to cash advances.
  • If you have not paid the full amount by the due date in may cases the interest free period will be cancelled. If interest is charged form the purchase date instead of the due date you will pay more interest. Look for a card which charges interest from the due date in this circumstance.
  • Avoid having more than two credit cards so that you can save on annual fees.
  • Avoid accepting offers to increase limits. Just because the bank offers you a higher limit doesn't mean you can afford it.
  • If you want to have a rewards program, check whether the rewards offered suit you lifestyle. If discounts or bonus points are offered, would you be likely to make purchases at these retailers?
  • Avoid using store cards if you aren't paying them in full each month. They incur a significantly higher interest rate than most credit cards.
  • Benefits on loyalty programs have become more restricted recently with caps on the amounts of points you can earn, rewards points devalued and fee increases.
  • Reward programs will only add to the expense of the card and therefore they shouldn't be a priority in card selection.

This article is reprinted from our quarterly published "Financial Matters" Newsletter, Summer 2005 issue.

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