Taking a closer look at credit card costs

When it comes to rewards, some card holders need to spend up to $800 a week to break-even on the annual fee.

Home loan interest rates may be at their lowest point in decades but the same can’t be said of credit card rates. With a Senate Committee currently investigating credit card charges, maybe it’s time the rest of us took a closer look at what we’re paying on the plastic.

A recent survey by ME Bank found half the nation’s households admit to being stuck in a credit-card roundabout where they are unable to pay off their card in full each month.

Part of the problem is the difficulty in gauging the true cost of a credit card.

Research by comparison site Mozo shows around 40 per cent of credit cards offer honeymoon deals featuring a low introductory rate or discounted annual fees. Fast forward to the end of the honeymoon period and the annual card cost can escalate by almost $700 thanks to higher fees or interest rates.

The presence of honeymoon or intro-deals makes it essential to look at the ongoing cost of a card once the honeymoon period ends. At present, ongoing card purchase rates range from about 8.99% to 23.5% annually.

Interestingly, honeymoon offers typically apply to the more expensive credit cards. Low rate cards rarely involve these sorts of sweeteners.

One pitfall to be especially wary of is credit cards offering rewards. Separate research by Mozo found one in five reward cards combine high fees with low value rewards to the point where the average spender won’t earn enough in rewards each year to cover the card’s annual fee.

Indeed in some cases, card holders need to spend nearly $40,000 each year―almost $800 per week―on their card to earn sufficient rewards to break-even on the annual fee. With other cards, you need to spend $64,000 on the card to earn sufficient points to receive a $100 gift card.

Importantly, reward-based credit cards may only offer real value if you don’t have an ongoing card debt. If you’re unable to clear the slate each month, chances are you’ll be better off with a low rate card and bypassing rewards altogether.

For card holders who are seriously struggling with card debt, using a personal loan to pay off the balance can offer savings in overall interest costs as well as providing set monthly repayments and a firm date for when the debt is wiped clear.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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