Australian banks are becoming concerned about consumer debt levels dropping and with them the bank’s potential profit levels.
According to the RBA, the average standard credit card interest rate in Australia is an eye-popping 19.6 per cent. It is no wonder that when the banks observe a drop in the average credit card balances, they get concerned. To attract us back to using credit cards, expect offers of gifts, rewards, temporary rate reductions and much much more. However not everything is what it seems. Before accepting the discounts, gifts and rewards on offer, think about the hidden costs.
There are many different rewards credit cards on offer. Banks are happy to throw at us offers of flights, goods or vouchers as long as we keep spending on credit to rack up reward points. Unfortunately for many of us rewards cards have somehow become a status symbol. We think that it does not matter that we have blown our budget this month as log as we keep building up the reward points – this is a mistake. Rewards credit cards pretty much without an exception are cards that come with a hefty annual fee. When we try to quantify the value of the gifts received from our bank in return for money spent and annual fee paid, it becomes clear that reward credit cards are not good value.
Zero interest cards are cards that offer to charge you no interest for a limited period of time on credit card balances that you transfer from other card providers. These are like the bank “loss leaders” – being products that bring no revenue in the hope that they will be able to charge you on other products.
Borrowing money at zero per cent interest may sound attractive, but the banks are not in the habit of offering something for nothing, not unless there is an opportunity to earn more in the future. Such low rates are only available because eventually, some people will pay the very high rates charged when the honeymoon period is over. It is up to you to make sure that you do not fall prey to this trick.
Balance transfer cards can save you money if used correctly. However if you start using these cards for making new purchases after rolling over your existing debts, you will quickly see that any benefits from the zero interest offers are eroded from the rates applicable on your new purchases.
The only essential feature in a credit card is an interest free period. Most cards will offer up to 55 days credit at no cost. You can beat the banks at their own game if you choose to use a credit card that has no annual fees and an interest free period on purchases. Then providing you only spend on credit what you can afford to repay by the end of the interest free period, your credit card will cost you nothing but will actually save you money – being access to free credit for up to 55 days
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