Credit cards – choose wisely

You might be across the annual fees but are you aware of the interest charges?

There are 16.58 million credit cards in circulation in Australia – equal to just over two cards per cardholder. But when it comes to selecting a credit card, many of us fail to focus on how a card will impact our hip pocket.

Research by comparison site Finder found annual fees are the main aspect we consider when choosing a credit card, with 81% of people looking for a card with low or zero annual fees. On the plus side, there are over 100 credit cards available with an annual fee under $50, and over 40 that charge no annual fee at all.

On the downside, the card interest rate is seen as less important, with just 38% of people making a low rate their top priority.

Credit card rates range from less than 10% to more than 20%, and a high rate can quickly wipe out the savings of a low annual fee. If you carry an ongoing card balance it is especially important to keep a lid on interest charges because you won’t get the benefit of interest-free days.

If that sounds like you it’s worth opting for a card with the lowest rate possible.

For one in five (21%) cardholders a good rewards program is a valued card feature. The appeal of card rewards is understandable. We all like to get something for nothing. But in many cases the rewards all flow the card issuer’s way.

There is a vast array of card reward programs available though the common thread is that they are expensive to run. These costs are passed onto cardholders, typically in the form of high annual fees and expensive interest rates.

As a guide, a number of reward cards charge annual fees above $200. Some go as high as $749. Yet according to research by Mozo, the average reward card delivers just $6 worth of value per month, and you’ll need to rack up plenty of purchases on the plastic just to get this level of reward. In some cases you need to put $64,000 worth of purchases on the card just to receive a $100 gift card. Looked at in this light the perks aren’t so rewarding at all.

Mozo says the best value rewards cards are those aligned to airline point schemes. Nonetheless, it’s still going to take an average card spend of $13,760 to earn a one-way flight from Sydney to Melbourne – an airfare that can potentially cost as little as $60 if you pay for it yourself.

Importantly, if you have an ongoing card debt, skip the rewards altogether. It’s likely the value of any freebies will be far outweighed by interest charges. It makes more sense to opt for a low rate card and use the savings on interest to pay down the balance.

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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