It pays to be informed with credit cards
Credit cards can be convenient, especially when travelling overseas and making purchases online. And a credit card can be good to have in case of an emergency. But unless credit cards are used wisely, they will be very expensive. For starters, foreign purchases will usually have a foreign transaction or currency conversion fee of 2 per cent to 3 per cent. And then there are the eye-watering interest rates charged on late payments.
Those interest rates on credit cards can be more than 20 per cent a year if the debt on the card is not paid off in time. Usually, the marketing for the cards will say the cardholder has up to 55 days to pay off the card without being hit with interest.
What is not well understood is that with most cards the whole debt has to be paid off by the due date to avoid interest. In other words, even if part of the debt is paid off by the due date, the interest will apply to the entire debt.
Regardless of whether the whole debt is repaid, the card requires a certain minimum amount of the debt to be paid off each month.
There are penalties in failing to pay the minimum. The interest could be charged back to the purchase date and the interest-free period could be cancelled on further purchases.
You should also be aware that paying for a taxi or booking a flight with a credit card is likely to incur a surcharge. Paying by debit card sometimes incurs a smaller surcharge or no surcharge at all.
For those who get into trouble with their credit cards, the credit-card companies have a ready solution: the balance transfer offer, where a card has a low-interest or interest-free period on the balance that is transferred.
Usually, the interest-free or low-interest period lasts for a period of months.
You will still have to meet the minimum monthly repayment, and any annual fee and the remaining balance after the interest-free period will accrue interest.
Then there is the appeal of the rewards points schemes and all those free flights and other goodies on offer. Closer inspection shows rewards schemes are not as good as they first seem.
The cards with rewards usually also have higher annual fees. Jeremy Cabral, the personal finance publisher at carditcardfinder.com.au, says a spend of $20,000 might be needed to translate into points worth a mere $100. A student with a part-time job is going to be paying higher annual fees for nothing in return.
If looking for a credit card, do not just go with the card offered by your bank. First check out what is on offer from the non-profit mutual banks, credit unions and building societies.
Frequently Asked Questions about this Article…
For students and young adults with only small incomes, a debit card linked to a transaction account is often the safer choice. Debit cards limit you to spending money you actually have and usually carry only minimal account-keeping fees, whereas credit cards can lead to expensive interest and charges if not used carefully.
Key fees to watch include foreign transaction or currency conversion fees (typically about 2%–3% on overseas purchases), annual card fees, and surcharges for things like taxis or flight bookings. Also be aware of penalties and interest charges if you miss payments — these can quickly make a card costly.
Cards often advertise up to 55 days interest-free, but that usually only applies if you pay off the entire balance by the due date. If you only pay part of the balance, interest will typically apply to the whole amount. In short: you generally must clear the full balance each cycle to keep the interest-free benefit.
Failing to meet the minimum monthly repayment can trigger penalties such as having interest charged back to the original purchase date and losing the interest-free period on further purchases. Card interest rates on overdue balances can be very high — often more than 20% a year — so missing payments is expensive.
Balance transfer offers can help by giving a low- or interest-free period on transferred debt, but they come with conditions. You still must meet the minimum repayments, may pay an annual fee, and any remaining balance after the promotional period will start to accrue interest. Read the fine print to see if the deal truly reduces your long-term cost.
Rewards schemes can look attractive, but they’re not always great value. Cards with rewards often have higher annual fees. As one example cited in the article, a spend of about $20,000 might translate into points worth only around $100, so light spenders — like many students — may end up paying more in fees than they gain in rewards.
Credit cards can be convenient for overseas travel, online purchases, or emergencies because of broader acceptance and short-term credit. However, if you’re worried about overspending or paying surcharges, a debit card may be preferable since it limits you to your available funds and can incur smaller or no surcharges in some cases.
Don’t just accept the card your bank offers. Compare options from mutual banks, credit unions and building societies as well as mainstream banks. Look at interest rates, foreign transaction fees, annual fees, rewards value, balance transfer terms, and minimum repayment rules to find a card that fits your spending habits and financial goals.
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