No-frills credit card rates have gone up more than standard cards
Credit union card rates can be cheaper than the banks.
People carrying debt on low-rate, no-frills credit cards have seen their average interest rates climb significantly over the past two years while standards cards with reward programs have hardly changed.
A CHOICE investigation has shown the average interest rate for no-frills cards, which are most commonly used by those struggling to pay back their balance in full, has actually risen over the past two years from 11.15% to 12.05%.
But standard credit cards, which often have a rewards program or scheme attached, had only gone up marginally during the same time from an average rate of 17.80 to 17.90%.
CHOICE says given that over the same period cash rate fell from 6.25% to its present historic low of 3% credit card customers should reasonably have expected their interest rates to have gone down too.
“We cannot see any legitimate reason why these rates have not decreased in line with reductions in the cash rate. It is of particular concern that low-rate cards, traditionally those on which consumers carry debt, have been gouged with higher interest rates,” said CHOICE spokesman Christopher Zinn.
CHOICE says there are a number of cheaper card options available, particularly from smaller financial institutions such as credit unions, which currently charge between 8.9% and 10.75%.
Consumers can make big savings by using the right card. The difference in interest paid with a rate of 9.85%, compared with 16.25%, by making the minimum repayment plus $50 extra a month to clear a debt of $2500 means saving close to $300 in interest with the lower-rate card.
There can also be benefits switching to cards with low introductory rates if consumers are confident they can pay back any accumulated debt within the usually six-month interest-free period.
“However, you must use it only as a way to pay off your debt and not as another credit card for new purchases, as you will accrue more interest on these instead of paying off the debt at the lowest interest rate first,” warns Zinn.