Credit cards - don't get stung

There’s no denying that credit cards make life a hell of a lot easier, but the banks seem intent on making us pay for the convenience by charging unreasonably high credit card interest rates.

Interest rates on most banking products – such as home loans, savings accounts and term deposits – have come down in line with reductions to the cash rate by the Reserve Bank of Australia, but not so for interest rates charged on credit card purchases. According to RateCity chief executive Damian Smith, Australia’s major banks are charging a 25 percent interest rate premium on credit cards – costing the average consumer $600 extra per year, and depositing $120 million a month in banks’ coffers.

The average credit card rate is currently around 16.67 percent, but would be 12.68 percent had the banks passed on RBA rate cuts over the past five years. While they failed to pass on recent rate cuts (with the exception of National Australia Bank, which dropped the rate on its Low Rate Visa Card by 25 basis points on January 9), the big four banks all raised their rates when the RBA last raised rates in November 2010.

“The only thing that may change the banks’ behaviour is if a large number of consumers switch from credit cards with high interest rates to low-rate cards,” Smith said.

A dose of healthy competition may also do the trick. “Credit card spending has definitely slowed in the past two years and if that keeps up, banks may have to respond by lowering fees or lowering interest rates.”

In the meantime, there are things you can do to ensure you get a better deal. The first tip, according to Smith, is to ensure you have the best card for the way to spend and make repayments. “There are plenty of people with cards with a high interest rate because they offer rewards, but you have to spend a lot to enjoy any benefits.”

In fact, when you factor in the annual fee, you’ll need to spend $60,000 in one year to see any benefit from rewards cards. When evaluating which credit card is best for you, take a look at the headline rate, annual and ongoing fees, and the number of interest-free days.

The most helpful tip is to ensure you pay more than the minimum repayment required. “More than two million people only repay the minimum, which is a risky strategy,” Smith said. “A $5000 debt repaid at the minimum 2 percent per month will take you nearly 30 years to repay.”

Inertia is the biggest factor holding people back from switching to a more suitable credit card, Smith added. “You can end up paying hundreds of dollars a year more than you have to by not switching to a better card. Of all the financial products, they’re just about the easiest to switch – an hour of your time now can save you $500 this year.”

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