Paying off and cancelling my credit card

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"Just for emergencies..."

Last updated: 27 August 2015

I was studying at uni and working casually when I applied for my very first credit card. My limit was very small – just $1500 (thank goodness!) – and the plan was that I would only use it as emergency money for my trip to Europe. Afterwards, I told myself, I'd pay it off and cut it up.

I clearly remember the day the card arrived in the mail; I signed the back of it and promised myself I'd be responsible. But four years later I was hooked – and still using my credit card.

I was continuously transferring money online between my everyday savings account and credit card. Because both accounts were linked, it was so easy to forget that the $1500 credit I had "available" was actually borrowed money. And that credit certainly did come in handy sometimes: when I was told out of the blue that I needed to pay a $1000 rental bond, off I went to the ATM to withdraw it as a cash advance.

While I'd always considered myself to be a savvy consumer, when it came to my credit card it turned out that was far from the case. I never understood the importance of paying a credit card off in full each month, let alone the interest rate or minimum monthly repayments.

When I started working at CHOICE, I owed almost the full balance of $1500.

Working out how much my credit card was costing me

I began covering financial issues for CHOICE, and discovered I was one of the 64% of Australian cardholders who didn't know their interest rate. I was paying minimum monthly repayments, thinking I wouldn't be charged interest on my debt, when it actually meant I was only avoiding late fees.

Using the ASIC Smart Money online tool, I calculated that if I continued paying the minimum monthly repayment amount on my statement, it would take a whopping 17 years and seven months to pay off. I'd also end up paying an extra $3236 in interest. And I was on the "low fee" card, with a 19.74% interest rate.

I felt pretty cheated. I'd always been a loyal Commonwealth banker – all the way back to primary school, through the Dollarmites savings program.

That's when I decided to act. I set about paying back my debt in bigger chunks, as fast as I could afford to, and before I knew it I was ready to cancel my card.

Ditching the card

At first I picked up the phone to cancel, but was told I had to make a trip to my local branch and do it in person. I was surprised again – the bank allows you to simply apply for a credit card online, yet when it comes to cancelling it's not so convenient.

The woman at the counter said it was a rarity to have someone walk into the bank completely debt free. She then asked why I was cancelling my card, and I said I no longer needed or wanted it. After some small talk, she then hinted that she loved her rewards card because she could shop with her points. In fact, she had $1000 to spend at Myer! Another staff member walked past and chimed in: "Oh yes, I love my rewards card! I saved up my points for five years and got a free ticket overseas."

Recognising their subtle selling tactics, I smiled and said "Oh, cool", attempting to project a polite lack of interest.

After signing a couple of documents and answering a few more questions, I was handed the phone to speak to another woman, who wanted to confirm my details and double check that I still wanted to cancel my card.

Again, I was asked my reasons for cancelling. Did I have anything in case of an emergency? Did I shop online, and did I want to keep it for this, because some people don't like to use their savings? I said I had a debit card and savings.

And once again, I had to confirm that I still wanted to cancel my credit card.

Lessons learned

Despite their best efforts, I successfully cancelled, and left the bank that day feeling light as a feather.

But I have to admit, if I didn't know any better a "free" flight overseas and $1000 to spend at Myer just for using a credit card would sound very, very appealing.

Fortunately, Mozo has run the numbers on the average rewards card. To earn just $100 cash back, you'd have to spend an average of about $17,926. A "free" return flight from Sydney to London would require an average spend of $188,913 – not so much of a bargain. (For more on dodgy credit cards, check out our latest investigation into flight rewards cards.)

I learned some valuable lessons from my credit card journey. I won't ever be in a rush to get another one. If I do, I'll be making sure I shop around for the best deal (like a genuinely low-rate card) – my new goal is to do much less borrowing, and much more saving.

What I learned:

Know your interest rate and cash advance rate.
Even if you can't pay off the whole balance every month, don't be fooled by the "minimum repayment" – paying back just that amount will see you racking up piles of interest on the rest.
Once you prioritise working on your debt, you'll be surprised how quickly the extra payments add up.

Have you felt cheated or let down by your credit card issuer? Have you been frustrated by too-high interest rates, shonky reward schemes or sneaky fees? Join our Better Credit campaign and help us show the big banks how they can do better by consumers.