Credit cards 101

Most would agree that credit cards can make life easier. If not handled correctly, however, they can also make life difficult. The best way to avoid getting bogged down in credit card debt is to understand how credit cards work.

Interest rates

A recent survey by consumer group Choice found that nearly half of Australians don’t know or aren’t sure what interest rate applies to their credit card. If you are among that group, you may be surprised to know that credit cards have higher interest rates than other forms of credit, and certainly much higher rates than savings accounts.

While the interest rate varies depending on the card’s features, the average credit card interest rate in Australia is around 17 percent. By comparison, among the 500-plus high interest savings accounts listed on RateCity.com.au, the highest interest rate offered at the time of writing was 4.5 percent by ING’s Savings Maximiser.

Unless you pay the full balance owed on your credit card each month, you are charged intereston all outstanding transactions and can end up paying a lot more than your original purchase amount.

Honeymoon rates

Some cards offer a lower introductory or “honeymoon” interest rate but it will eventually revert back to the standard rate. It is important to check whet the interest rate will be at the end of the honeymoon period, and what fees and charges come with the offer.

Fees & charges

Most cards carry an annual fee, ranging from $25 to $700 depending on the benefits they offer, but there are 26 cards in the RateCity database charging no ongoing fees. However, no-fee credit cards may come with a higher interest rate or a strict credit limit, so it’s important to do your research and assess which card is right for your spending habits.

Credit cards can also carry cash advance fees, late payment fees, a foreign currency transaction fee when you use your card overseas, and over-limit fees if you spend more than your credit limit. A growing number of banks now also charge a replacement fee for lost cards.

Minimum repayments

You bank calculates your minimum monthly repayment based on your closing balance. If you’ve spent less than $10, you’ll have to pay the whole amount. If you’ve spent between $10 and $400, the minimum repayment will be $10. For balances above $400, your minimum repayment may be 2 percent of the amount you spent, but this may depend on your provider.

Paying the minimum repayment each month simply means you avoid a late payment fee, and end up paying interest on the rest of the outstanding balance.

Interest-free period

The majority of credit cards offer interest-free periods (44 or 55 days), which means you pay no interest for a certain number of days. The interest-free period is calculated from the start of your statement period, however, not when you make the purchase.

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