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.
If you have a credit card with a high interest rate, and don't always pay it off each month, then it's time for you to throw in your hand and get a better deal.
In this report, we suggest smart ways to save on credit card fees, and tell you about the traps to watch out for. Also, use our Credit cards compared tool to compare interest rates, fees and features for over 200 credit cards from major banks, credit unions and non-bank lenders. The data is supplied by Cannex and updated daily.
Please note: this information was current as of May 2008 but is still a useful guide to today's market.
- Even if you owe as little as $500 on a credit card, you may never get out of debt if you only repay the monthly minimum. As an example, we’ve based our calculations on a credit card with an 18.25% interest rate and $40 annual fee. The minimum monthly repayment is the higher of 2% or $10. If you just repay the monthly minimum (but not the annual fee, which gets added to your total debt), after 50 years your outstanding balance would actually grow to $664.
- If you owe $1000 but pay all fees and then the minimum each month, it’ll take 20 years before you eventually pay the card off.
- Don’t believe debt consolidation and refinancing advertisements that promise to take all your financial problems away! We've compared paying off a $5000 debt with a credit card over 1 year, a personal loan over five years, your mortgage over seven and 25 years. Paying off the credit card in one year is the best option. Adding your credit card debt to a 25-year mortgage is the worst option, costing you around double.
- If you’re tempted to switch to a card with a low honeymoon rate, check what the rate reverts to. Some cards with low introductory rates revert to above average standard rates at the end of the honeymoon period.
- You can make big savings if you’re on the right card. For example we've calculated that paying off a debt of $2500 with the minimum repayment plus $50 extra a month will cost you about $294 less if you have a credit card with a standard rate of 9.85% compared with a credit card at 16.25%.
How are CHOICE tests different? We buy all the products we test – we don’t accept industry freebies and we don’t take ads. We're non-profit and our work is funded by people like you.