Wake up to exponential credit card blow-outs
But it might come as a surprise that despite one rate cut this year, and four last year, as many as 13 credit-card providers haven't cut rates on their cards at all over the past 12 months.
Providers have learnt that they need to be pretty quick on following through with cuts on their mortgage rates if they want to avoid a backlash, and they're very responsive when it comes to cutting rates on deposit products. But it appears they know our inertia means we don't grumble too much when credit card rates remain high.
Why is that? Why are many of us happy to stay with cards with purchase rates as high as 20 per cent? Perhaps a little simple number crunching will make you question your inactivity.
Let's say you have credit card debt of $3000 on a card with the average rate - currently 17.16 per cent, according to comparison website Mozo.com.au. If the card has a minimum repayment of 2.5 per cent, your minimum repayment is $25. But if you only repay that amount each month, guess how long it will take to pay off the entire debt? More than 27 years - and it will cost $5928 extra in interest, according to Mozo calculations.
Let's say you manage to pay back $100 a month instead of just the $25, then it will still take 3.67 years and cost $1037 in additional interest. But surely that sounds better than the numbers mentioned above.
Increase that payment to $200 a month and you only pay an extra $410 in interest and it will take 1½ years to pay off. You may notice that calculations such as these have started to appear on your credit-card statement as well.
If you have managed to rack up a sizeable debt on your credit card, you can always transfer the balance to a zero-rate transfer card. But make sure you understand the terms and conditions that come with these. The interest-free period can be very short, and any additional purchases made on that card may be charged at the default interest rate, which can actually be quite high. But if used wisely, you can knock off your credit card debt very quickly without racking up any extra interest charges.
So now that you know how much you could be saving - or, to put it bluntly, how much you're wasting - isn't it time to exercise some discipline around your repayment habits? Your hip pocket will thank you for it.
David Potts is on leave.
Frequently Asked Questions about this Article…
Many financial institutions have been slow to pass on rate cuts to credit cards. The article notes there was one cut this year and four last year, yet as many as 13 credit‑card providers hadn't cut card rates in the past 12 months. Providers tend to move faster on mortgage and deposit rates because customers react quickly, while they rely on consumer inertia when it comes to credit card rates.
According to comparison site Mozo.com.au (cited in the article), the average credit card purchase rate is 17.16%.
Using the article's example, a $3,000 balance on a card with a 17.16% rate and a 2.5% minimum repayment ($25) would take more than 27 years to pay off and would incur about $5,928 in extra interest according to Mozo calculations.
The article shows that paying $100 a month on a $3,000 balance at the average 17.16% rate would take about 3.67 years to repay and cost roughly $1,037 in additional interest.
Increasing repayments to $200 a month reduces the repayment time to about 1½ years and cuts total additional interest to around $410, per the article's example.
A zero‑rate balance transfer can be useful, but the article warns to read the terms carefully: the interest‑free period can be short, and new purchases on the card may attract a high default rate. If used wisely — moving the balance and avoiding further charges — you can pay off debt quickly without extra interest.
Providers have begun including payoff calculations on statements to highlight how long balances take to clear and how much interest consumers pay. The article suggests these figures are appearing to make customers more aware of the true cost of minimum repayments.
The article recommends exercising discipline with repayment habits: increase your monthly payments where possible, consider a properly used zero‑rate transfer, and review statement calculations to understand the savings from higher repayments — your 'hip pocket' will benefit.
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