Dont get bitten by the card sharks

The cash rate has fallen dramatically, yet banks are failing to pass on the savings to consumers and have hiked up credit card interest rates.
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  • Updated:11 Jun 2009

01.Choose your credit card wisely

Woman looking at bill

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.

Please note: this information was current as of June 2009 but is still a useful guide to today's market.

Institution / card (in order of interest rate)
rate* (%)
fee** ($)
Free days
Mecu Low Rate Visa Credit Card
8.89 59 0
Satisfac Credit Union Visa Credit Card S10
10.24 10 55
Community First CU Low Rate Visa Credit Card
10.50 40 55
Sydney Credit Union Visa Credit Card
10.64 30 55
Heritage Building Society Visa Gold No Frills
10.75 Nil 0
Bendigo Bank Basic Black Visa/MasterCard
10.75 45 44
BankWestLite MasterCard
10.75 59 55

*Ongoing interest rates. Some of these card may have lower introductory rates.
**Some of these cards may waive the annual fee for the first year.
Source: Canstar Cannex, May 18, 2009

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.

Time to
Total amount repaid ($)
Minimum repayment only
239 3034
Minimum repayment plus $50
19 1148
Minimum repayment plus $200
5 1045
* Repayments calculated for a credit card with 18.25% interest rate and $40 annual fee. Minimum repayments are 2% or $10, whichever is higher. These calculations assume all fees are paid plus the regular amounts shown.
Source: CANSTAR Cannex

Make low introductory rate cards work for you

If you’re confident you’ll be able to pay back any accumulated debt within the introductory period – usually six months – you could consider applying for a card with a low introductory period and transfer your balance over to the new card. 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.

You also need to check what interest rate you will pay once the introductory period is over. Some cards with low introductory rates revert to high rates at the end of the period. Also, find out how high the annual fee is and how it compares against the interest saving.

CHOICE verdict

CHOICE does not see any legitimate reason why interest rates on credit cards 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.

Choose the right card

If you’re thinking of switching credit cards, go to our calculator to compare credit cards available in the market. You’ll be able to get general information such as interest rates, annual fees and interest-free days for all cards and there is a more comprehensive profile comparison which provides details on areas such as penalty fees and balance transfers.

Check what interest rate you'll pay once the introductory period is over.



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