Credit cards come with more bells and whistles than ever these days, from rewards schemes to travel insurance to frequent flyer points. In fact, credit card companies seem to be running out of precious metals to name their cards after – silver and gold are old hat by now, and platinum doesn't have the ring it once did. Titanium, anyone?

Credit card companies market their products aggressively and sometimes even skilfully, but it's important to keep your eye on the fundamental purpose of these ubiquitous financial products – borrowing money.

Whether or not you end up paying interest on the loan depends on whether you pay off the balance during the interest-free period, which can be as high as 55 days. The credit card people really hope you don't, since interest payments are how they make their big piles of dough. Their master plan of getting you in debt seems to be working out.

Credit card debt in Australia is expected to hit about $52 billion by the end of 2014, and the average credit card holder had an unpaid balance of about $4,412 when we checked in May 2014. About one-sixth of overall debt is likely to be interest based on previous trends.

Mind-bending interest calculations

Knowing how much interest you'll be charged if you pay late can be especially tricky, since credit card providers all seem to be operating on a different space/time continuum and using different calculators.

To make a long and complicated story short, you could have two cards with exactly the same interest rate and use them in exactly the same way, yet one may end up charging twice as much interest as the other if you pay late. (Tip: stick with the card that charges half as much.)

The underlying issue is that most companies charge daily interest all the way back to the date of your original transactions. This means that for being one day late on a minimum payment, you could be charged retrospective daily interest on all transactions for up to 55 days, not on the amount you still owe.

For example, if your credit card bill is $2000 and you repay $1900 on time, most companies will charge interest on the full $2000 balance, backdated for up to 55 days, not the $100 in arrears.

To make matters worse, if you fail to pay your full bill on time, most card providers cancel your interest-free period for any new purchases you make from that point until you clear the balance owing in full. Yes, credit card companies can be quite devious, as you may have noticed. After all, who really gets their head around this stuff!

As one CHOICE member told us: "The way my credit card provider uses one instance of late payment to effectively remove the 55-day interest-free period on new purchases is shameful. Their description of how they apply interest is ambiguous and defies rational understanding."

It's tricky stuff – but this is one of the reasons credit card companies are so fabulously rich!

Balance transfer credit cards

Credit card companies love to advertise low interest rates for debts transferred from other cards as a way to attract new customers. Usually, the interest rate applying to the balance transfer ranges from 0% to 5%, for a period of four months up to as long as it takes you to repay the debt.

Switching to a low-interest balance transfer credit card can be a good way to get a handle on your debt, or to avoid making repayments for a specified time. But for the unsuspecting or undisciplined, balance transfer cards can be a disaster.

Card companies also use balance transfers to reel people in with tempting offers but then slug them with hidden catches that can create even bigger interest bills than before.

How it works:

  • You sign up with a new card and provide details of your old card.
  • The new company transfers the balance of your old card across to the new card.
  • The balance transfer interest rate applies to that amount only.
  • If you're currently carrying a debt on your credit card, this can lower your repayments, or suspend them for a while, enabling you to get back on track.

The top five balance transfer credit card traps

1. The 'payment hierarchy' con

When you make repayments, they're firstly applied to the balance transfer amount – even if it has a 0% interest rate, and even if other purchases and cash advances are accumulating interest at higher rates. In other words, the credit card people have rigged it so you'll end up paying as much interest as possible.

As one credit card provider puts it: "Payments made to your credit card account are first applied to any amounts transferred from other credit cards, charge cards or store cards under this promotion, before they are applied to any other purchase or cash advance amount. This means that the portion of your outstanding account balance that is subject to a lower interest rate will be paid off first."

Katherine Lane, Principal Solicitor with the Consumer Credit Legal Centre in NSW, told us the payment hierarchy practice "is a trick most often used in interest-free deals to trigger interest being charged. It is completely unfair."

2. High interest on new transactions

After you transfer your debt to a low-interest card, any new transactions you make usually attract interest immediately at the standard rate, which is invariably much higher than the low introductory rate. You may have no interest-free period with such transactions.

As one 2.9% balance transfer card disclaimer puts it: "Any transactions made other than with this offer are at the standard Credit Card rate, currently 20.39% pa."

Another disclaimer says: "You will not gain the benefit of the interest free period on credit purchases until the full balance (including any balance transfer and any other promotional amount) is paid by the statement due date each month."

3. Luring you into a bad deal

The balance transfer might simply be the hook that lures you into a card that's otherwise poor value in terms of fees and standard interest rates. Many have standard annual interest rates close to 20% or even higher that will kick in after the introductory, or teaser, rate.

4. Percentage fees

A fee may apply to transfer the balance. The fine print of one balance transfer card puts it nicely: "A 1% Balance Transfer Handling Fee to a maximum of $50 applies to each balance transferred." If you're transferring a lot of debt, that can really add up.

5. Double trouble

You might be tempted to keep spending on the old credit card, increasing your debt problems and creating even bigger debt repayments. We recommend cutting up the old card.

Credit card reward schemes

Credit card reward schemes are mostly a glitzy gimmick unless you're a really big spender, since rewards cards nearly always charge hefty annual fees. According to the Canstar research we tapped in May 2014, credit card reward programs deliver little or nothing to consumers who spend less than $18,000 a year. At that spending level – the average for Australians – card fees would likely nullify any gains.

Worse, it's possible to actually lose money on reward-linked cards. If you spend $12,000 a year, you'll only early about $56 worth or rewards, while annual fees can range from $50 to as much as $495.

The outlook improves only slightly with higher spending levels. At $24,000 a year, cardholders would earn a mere $113. At $60,000, you'd be eligible to claim about $284 worth of rewards.

A CHOICE investigation of 63 reward credit cards found that consumers would need to spend at least $2000 a month to get any return, while those who spent $1000 a month or less would pay more in annual fees than they get back in rewards.

Converting the points into goods can be equally unrewarding. If you spent $1000 a month it would take about five-and-a-half years to earn the points equivalent to a digital camera worth $500. And you would need to spend at least $6600 on an average card to earn enough points for a $50 toaster.

How to pick the best card if you always pay your balance on time

  • Annual fees: Look for cards with no annual fee and one that offers interest-free days on purchases.
  • Number of interest-free days: You should have at least 14-25 days after the statement to clear your bill, thereby giving a maximum of 44-55 interest-free days on purchases.
  • Overseas transactions: Look for low currency conversion costs.
  • Rewards programs: You generally need to spend at least $2000 each month on your card to justify the annual fee for a rewards scheme. The schemes deliver little or nothing to consumers who spend less than $18,000 a year.

How to pick the best card if you may not pay your balance on time

  • Consider flicking your debt to a card with a low interest rate for balance transfers. These cards can give you some breathing space to get your finances back on track.
  • If you transfer your debts to a low-interest card, don't use it for new transactions as they'll attract interest from day one. Cut up your old card if the temptation to keep spending and racking up debts is too great.
  • Consider using a debit card instead. EFTPOS is a convenient and low-cost way to access money from your bank account. And MasterCard and Visa Debit cards let you transact online and overseas just like a credit card. Many financial institutions now offer debit/ATM cards with combined EFTPOS and MasterCard or Visa functionality.