01.Choose your credit card wisely

Consumers are getting a raw deal on credit cards. At a time when more people are struggling with debt and relying on credit to see them through, banks are nudging up credit card interest rates. Worse, people carrying debt on low-rate, no-frills credit cards have been hit hardest, with the average interest rate rising significantly over the past two years.

Banks typically offer a range of credit cards with different features, interest rates and fees. The Reserve Bank of Australia collects data for two types: standard cards, which may have a reward program and typically charge interest rates of about 18%, and no-frills, low-rate cards, which have fewer features, charge a lower interest rate and are recommended for people who struggle to pay back their balance in full.

Given the cash rate is at an all-time low, credit card customers should reasonably have expected their interest rates to have fallen. In July 2007, just before the credit crisis hit and when the cash rate was 6.25%, low-rate credit cards charged on average an interest rate of 11.15%. By this April however, despite the cash rate being at an historic low of 3%, credit card interest rates had actually risen, to 12.05% on average for low-rate cards.

In comparison, standard variable home loan rates came down from 8.05% to 5.75% in the same period. So banks are now taking a much higher cut from low-rate credit cards. Standard credit cards also went up slightly, on average from 17.80% to 17.90%.,

Smart consumers who’ve opted for low-rate cards to carry debt are therefore being penalised – a dangerous trap, especially now when unemployment is on the rise. But there are a number of cheaper card options available, particularly from smaller financial institutions such as credit unions; see the table for the cards with the five lowest interest rates, below.

How to get out of credit card debt

You can make big savings by using the right card. Consider, for example, the difference in interest you’ll pay with a rate of 9.85%, compared with 16.25%. Making the minimum repayment plus $50 extra a month to clear a debt of $2500 means you’ll save close to $300 in interest with the lower interest card. If you’re not in a position to pay off your card in full each month, make sure you pay at least the minimum to avoid a penalty fee – usually around $35 – then try to make extra repayments.

Every dollar extra makes a difference. If you owe $1000, pay only the minimum each month and cop all the penalty fees, you’ll end up paying more than $3000 across 20 years to clear the debt. Topping up your monthly payment with just an extra $50, however, will reduce total repayments to just $1148 across 19 months – see the table, below.