Wake up to exponential credit card blow-outs

It should come as no surprise that financial institutions haven't been forward in cutting back on interest rates on credit cards.

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.