Credit cards come with more moving parts 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?

Outright trickery in the credit card market seems to have a hit a high point as of late. In mid 2016, the federal government proposed a raft of reforms to help prevent consumers from falling prey to a range of tactics (see below).

CHOICE fully backs the reform of the credit card industry, which has been responsible for getting more consumers into dangerous debt than perhaps any other form of finance (though irresponsible home loans would also be in the running). 

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Getting you in debt

Credit card companies market their products aggressively and sometimes even cleverly, but it's important to keep your eye on the fundamental purpose of these ubiquitous financial products from the card issuer's standpoint – getting you to borrow money and pay interest.

Using your credit card to borrow money so you can buy something is about as unsound a financial decision as you're likely to make, unless of course you pay off the balance before the interest kicks in.

If you end up paying interest, you'll be paying interest rates that are bound to be far higher than those available outside of the credit card market, say with a personal loan.

And the card issuers can really stick it to you when it comes to interest rates. In an earlier investigation, CHOICE reviewed credit card interest rates from 55 major credit card issuers between November 2011 and May 2015 and found that only 16% of the issuers dropped their rates in line with the steady decline in the RBA cash rate over that period.

Instead of interest rates and annual fees going down as borrowing costs got progressively cheaper for the banks, both went up. 

A few good things to know

Credit card issuers (mainly banks and other deposit taking institutions) are keen on getting money out of you one way or another. Here are a few basics to bear in mind:

  • Credit cards with low interest rates generally charge higher annual fees, but they certainly make sense if you're going to use your card as a borrowing tool and wear the interest. Paying an annual fee makes better financial sense that paying a high interest rate, especially if you only make the minimum payment. 
  • Rewards cards can also give with one hand and take away with the other. They generally come with high annual fees that can easily nullify the rewards unless you spend a lot and earn a lot of rewards points.
  • Interest-free credit cards or balance transfer deals are always tempting and can make a lot of sense – but remember that the interest-free offer is for a limited time only. If you still have an unpaid balance on your credit card after the offer ends, your interest will likely jump into the stratosphere (or at least hover around 20% or so).

Our collective credit card debt

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 central to how they make their money.

Their master plan for getting us into debt seems to be working out. As of January 2017, the average credit card holder in Australia had an unpaid balance of about $4,262 and was paying $734 in interest per year.

Total credit card debt stood at $32 billion in January, with Australians paying a cumulative $5.5. billion in annual interest. You can see why financial services providers really like credit cards.

Mind-bending interest calculations

If you really want to beat the system, simply pay off your balance before the interest-free period ends. Otherwise, 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.

The result is that 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 credit card issuers charge daily interest – once it kicks in – all the way back to the date of your original transactions if you go past the interest-free period. This means that for being one day late on a minimum payment, you could be charged daily interest retrospectively on all transactions for up to 55 days, not just 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 have many ways of making sure you end up paying interest.

As one CHOICE member pointedly 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."

Minimum payment ruse

Credit card issuers dearly hope that you only make the minimum payment each month, thus drawing out your debt and the amount of interest you'll end up paying for as long as possible. Paying more than the minimum each month can have dramatic effects over the long term. 

The numbers tell the story best. If you owed $5000 on your credit card at 18% interest and made only the minimum monthly payment starting at $102 (about average for minimum payments on a $5000 balance at that interest rate), you would end up paying $17,181 over the 33 years it would take you to pay off the card.

If you paid $246 per month, you would end up paying $5,902 over the two years it would take you to get out of credit card debt, saving $11,279 along the way.

Balance transfer credit cards

Credit card companies just love to advertise low or no interest rates for debts transferred from other cards, purportedly to help you get out of debt. But it's really a ruse to bring new customers on board and get them paying interest down the road.

The interest rate applying to the balance transfer generally ranges from 0% to 5%, for a period of four months up to as long as it takes you to repay the debt. It can seem like an offer too good to refuse.

One big thing to bear in mind, though, is that the low-interest or no-interest offer generally applies to the amount you transfer over from another card only – not to any new purchases with your new card – and you will likely be charged a fee based on the amount you're transferring, one that can go as high as 3% (meaning you would pay $30 to transfer over $1000 and $300 to transfer over $10,000).

The longer the interest-free period, the higher the balance transfer fee. 

Switching to a no-interest or 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 certain period of time.  But for the unsuspecting or undisciplined, balance transfer cards can go terribly wrong.

And bear in mind that flipping your debt to a low-interest or no-interest promo deal too often can affect your credit rating, as can having multiple credit card applications rejected.

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 the card 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 this payment hierarchy technique "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 comes to a close.

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. And 3% fees are not uncommon, especially with longer interest-free offers. 

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 gimmick unless you're a big spender, since rewards cards nearly always charge hefty annual fees and high interest rates. Credit card reward programs deliver little or nothing to consumers who don't spend generously via their credit cards. 

A CHOICE investigation of 63 rewards 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 got back in rewards.

Our research has also shown that cards that reward you with frequent flyer points are a far better deal than gift card or cash back rewards cards, where rewards accumulate at a much slower rate.

Picking the best card if you always pay your balance on time

  • Annual fees: Look for cards with no annual fee and one that offers a generous number of 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 $24,000 a year on their cards.

Picking the best card if you may not pay your balance on time

  • Consider flicking your debt to a card with a low or no 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.

Credit card reforms

The government's proposed reforms to the credit card industry are well in line with the recommendations we put forward in our submission to the credit card inquiry.

  • Credit limits should be deemed too high if the borrower can't afford to pay within a reasonable time.
  • Unasked-for credit limit increases should be prohibited.
  • A standard approach should be established for the application of interest to unpaid balances at the end of an interest-free period.
  • Credit card customers should be able to easily reduce credit limits or cancel a card online rather than having to deal with bank staff charged with keeping their business.
  • Annual credit card costs should be clearly disclosed instead of buried in the fine print.
  • Annual rates and fees should be clearly disclosed in advertising and marketing materials, not deliberately hidden.
  • Customers should be provided information about how much they can save with other credit cards from the same issuer, such as genuine low-rate cards.
  • Customers should be regularly informed by email, text or other electronic communication about the expiry of special offers and how much credit they've used.
  • Credit card issuers should offer customers the option of making higher repayments and proactively contact customers who are making only minimum payments and drawing out their debt.