InvestSMART

Paul's Insights: Credit card debt hits 16-year low

The way we pay for things is changing - and in a major turnaround, Australians have wiped $6.3 billion off the nation's credit card debt during COVID.

Good news is welcome these days, and I was delighted to learn that Australians now have the lowest level of credit card debt accruing interest since December 2004.

In addition to paying down debt, research by RateCity shows we’ve been cutting up our credit cards in droves. The number of card accounts has dropped by over half a million since March 2020.

RateCity believes many people could be turning their back on credit cards for good. That’s not a bad thing. Australians still collectively owe $20 billion in card debt. And with annual fees that can be as high as $395 and interest rates exceeding 20% – at a time when home loans rates have dipped below 2%, it’s hard to argue that credit cards can be money for jam for card issuers.

But I’m not convinced that it’s ‘game over’ for credit cards just yet.

Reserve Bank figures[1] show one in five payments is still made using a credit or charge card compared to less than 2% for rival options like ‘buy now pay later’ (BNPL). I’ve also seen plenty of research showing BNPL users often spend more than they intended, so this payment method isn’t without pitfalls of its own.

When it comes to credit cards, one factor that can work in a card issuer’s favour is inertia. Consumers often don’t take the time to check if there’s a better deal available or make the move to a more competitive provider. And that can mean paying more than necessary.

Some card issuers are fighting back. NAB and CommBank have both introduced credit cards with zero interest. The catch is that there’s a flat monthly fee. This fee is waived in months when the card balance is zero and no purchases are made. But where that’s not the case, a flat fee can be the equivalent of a high interest rate especially on a low balance. This highlights the importance of crunching the numbers.

For a good deal on credit cards, it can be worth a look at credit unions and mutual banks, which often have super low rates.  Easy Street Financial for example, has a card rate of just 8.99%. Or pay just 7.49% with a card from G&C Mutual Bank.

With some shopping around, it is possible to cut card costs. For real value, look for a credit card with zero annual fees, and pay off the balance in full each month before interest charges apply. Better still, stick to a debit card.

 

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.

 

[1] https://www.rba.gov.au/publications/bulletin/2020/mar/consumer-payment-behaviour-in-australia.html


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