Banks ramp up credit card repayment plans

Banks ramp up credit card repayment plans

New research from RateCity shows banks are ramping up credit card repayment plans following the lightening success of Afterpay, with Australia’s biggest bank, Commonwealth also due to launch a repayment offering in coming weeks.

Credit card repayment plans have become a popular option over the last year, with prominent credit card providers such as AMEX, Bankwest, Citibank, ING Direct and Virgin Money all choosing to offer a repayment feature.

Repayment plans allow the cardholder to take a large purchase, a bundle of purchases, or even cash, and repay it in fixed amounts over an agreed period at a reduced interest rate of as little as 0 per cent.

But are they a good idea?

RateCity’s spokesperson, Sally Tindall, said these plans can get people out of a tight financial spot, but needed to be used with extreme caution.

“Credit card repayment plans can help if you need to buy an essential item and don’t have the cash to cover it, but only if you’re diligent about paying back the debt,” she said.

“But credit card repayment plans are riddled with hidden traps, that can trip up even the most discerning user.

“The main problem is when you start skipping repayments. No-one comes after you with a big stick. Instead what they’ll typically do is start applying the standard interest rate on what’s likely to be a significant credit card debt.

“The card provided will also go back to asking for just the minimum repayments, which could see your debt spiral out of control.

“One alternative for big ticket items is to take out a low rate personal loan. They force people to make regular repayments to pay off the debt in full, without the temptation to rack up more debt.

“Buy now, pay later services, such as Afterpay, are another option. With no interest and no upfront fees, it’s a cheap way to secure credit – provided you don’t miss any repayments.

“The problem with Afterpay is that the service is predominantly used for non-essential items. It’s one thing to borrow money to replace a broken fridge or to pay the gas bill, but when it comes to luxury items, we’d recommend people finance it the old fashion way – save up for it,” she said.

Credit card repayment plans – potential traps

  1. Not meeting a repayment, and getting charged the standard purchase rate.
  2. Failing to clear the debt within the repayment period.
  3. Losing your interest free days on purchases you put on a repayment plan.
  4. Paying fees to use the service.

Note: the terms and conditions are different for each card. Not every trap is applicable to each card.

Credit card repayment plans

Bank

Reduced rate

Loan term

Instalment fees

Interest free days?

Fine print

American Express

0%

3, 6 or 12 months

Set-up fee of 2-4%

Yes but not on instalments.

Once you set up a plan, every purchase over the nominated amount will go on to a payment plan and incur a fee. Does not allow extra repayments.

Bankwest

0.00% – 3.99%

3 mths –

6 mths

No

Yes but not on instalments.

No penalty for missing a repayment but any balance owing at the end of the fixed term will be charged at the purchase rate after one month.

Citi

7.90% p.a. to 12.99%

1 – 5 years

No

Yes but not on instalments.

If you miss a repayment the purchase rate will apply. You can make additional repayments but the money will go towards your standard credit card bill first.

ING

9.99%

3 mths –

7 yrs

No

Yes – both instalment and normal purchases

No penalty for missing a repayment but any balance owing at the end of the fixed term will be charged at the purchase rate.

Latitude Financial Go Mastercard

0%

From 3 mths

$25 setup fee and a $4.95 mthly fee

Yes but not on instalments.

Only for purchases at affiliated stores. If the contract is terminated or comes to an end with an outstanding balance it will attract a rate of 29.49%.

Note: selected fine print only. Always read the full terms and conditions before taking out a credit card.

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Learn more about credit cards

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

How to get a credit card for the first time

A credit card can be a useful financial tool, provided you understand the risks and can meet repayment obligations.

If you’re a credit card first-timer, review your options. Think about what kind of credit card would suit your lifestyle, and compare providers by fees, perks and repayments.

Once you’ve selected a card, it’s time to apply. Credit card applications can generally be completed in store, online or over the phone.

When you apply for a credit card for the first time, you must meet age, residency and income requirements. As proof, you must also provide documentation such as bank account statements.

How to pay a credit card from another bank

Paying or transferring debt from one lender to the other is called a balance transfer. This involves transferring part or all of the debt from a credit card with one lender to a credit card with another. As part of the process, your new lender will pay out the old lender, so that you now owe the same amount of money but to a new institution.

Many credit card providers offer an interest-free period on balance transfers to help new applicants better handle their debt. During this period, cardholders are not required to pay interest on the debt they brought over from the other card. This can be a great opportunity for consumers to pay off credit card debt with no interest. There are often fees associated with balance transfers; normally, these are a percentage of the amount transferred.

So make sure you read the terms and conditions of the card before transferring any debt across.

How to get rid of credit card debt

  1. Calculate your debt. Credit card calculators make it easy to determine the repayments required to chip away at your debt in the shortest timeframe possible for your budget.
  2. Repayment plans. Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
  3. Talk to your credit provider. If you’re still struggling with your debt, give your credit provider a call. You may be able to come to a new arrangement.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

Which credit card has the highest annual percentage rate?

The credit card market changes all the time, so the credit card with the highest annual percentage rate is also liable to change.

Keep in mind that credit card interest rates are expressed as a yearly rate, or annual percentage rate (APR). A low APR is generally good but also consider:

  • There can be different APR's for each feature of the card (e.g. purchases may have an APR of 14 per cent, while cash advances on same card could have an APR of 17 per cent.
  • Credit cards with a variable rate can change throughout the year, affecting your APR, so check the full details.
  • If you pay your balance in full every month, having the lowest APR is not as important as the other fees associated with the card. However, if you carry a balance from month to month, then you want the lowest APR possible.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

How to get money from a credit card

You can get money from a credit card, but generally it will cost you.

Withdrawing money from a credit card is called a cash advance, as it operates more as a loan than a simple cash withdrawal. Because it is a loan, you may be charged interest on your cash advance as soon as you make the withdrawal. Interest rates are also usually much higher for cash advances than standard credit card purchases.

In addition to the interest rate, you may also be charged a cash advance fee. This could be a flat rate, or a percentage of your total cash advance. If you are considering a cash advance, make sure to add up how much it will cost you before committing.