John Collett -Jun 1, 2015
A little knowledge can save you hundreds of dollars on credit card fees and interest.
Call it a law of anti-gravity – the lower the cash rate. the higher the credit card interest rates.
Credit cards are very profitable for banks. Billions of dollars a year are paid by consumers in interest and fees to credit card issuers.
But why play their game?
Much of the interest and many of the fees are avoidable. Those who are disciplined with their card use are subsidised by the lazy and disengaged.
But the marketing of the cards has become trickier with issuers using all sorts of bells and whistles, including rewards programs and interest-free balance transfer cards, to win market share.
That means even the vigilant have to be on their toes. Here are 10 ways to get the plastic working for you.
1. Shop around
Forget any feelings of loyalty to your bank. Sometimes the best credit cards are those offered by the non-profit banks, credit unions and building societies.
Shop around with one of the online comparator sites for a better deal, but bear the following points in mind.
2. Low interest cards
If you are someone who always struggles to pay off the debt, in full, each month, go for a card with a low interest rate.
3. Know how interest works
When a credit debt is not paid off in full and on time, lenders usually charge interest on the whole balance, usually back to the date of purchases.
4. Beware the interest-free period
A further consequence of not paying off the whole debt on time is the interest-free period on further purchases is forfeited until the balance is paid off in full.
5. The awards card trap
Some rewards cards have such high annual fees the card-holder needs to rack-up tens of thousands of dollars on their cards just to break even.
Rewards cards usually have much higher interest rates on outstanding debt than non-rewards cards.
6. Taxi and airfare surcharges
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, which is linked to the card-holder's transaction account, often incurs a smaller surcharge or no surcharge at all.
7. Overseas use
While we are talking surcharges, purchases overseas on the card will usually incur a foreign transaction or currency conversion fee that can add up to 3 per cent to the cost of the purchase.
Travel cards, onto which foreign currency is loaded at home, usually have lower fees than credit cards.
Another advantage of travel cards is that the currency exchange rate is locked in before heading overseas.
8. Cash advances are costly
There is usually no interest-free period, with interest charged immediately on cash advances. Often the cash advance interest rate is higher than the interest rate on purchases.
9. Balance transfers
Credit card issuers offer balance transfer cards, where the card has a low interest rate or interest-free period on the balance transferred. Usually, the interest-free period or low-interest period lasts for several months.
Any remaining balance at the end of the period will accrue interest which, on balance transfer cards, can be higher than regular cards. The minimum monthly repayment still has to be made and balance transfer cards can have annual fees.
If you are unlikely to be able to extinguish the debt, you will be better off with a low interest rate card.
10. Ditch the credit card
For some, the best way to deal with credit cards is to not have any.
Debit cards could be used for everyday expenses with the credit card on standby for emergencies.
Most people, if they budgeted carefully, should be able to live without racking-up revolving debt on their credit cards.