REWARDS points, interest-free days or low rates – what should you look for in a credit card?
> Gen Y – Justine Davies
AH credit cards. How ever did previous generations survive without those personal lines of credit at interest rates of up to 20 per cent?
There are more than 200 different credit cards on the market now and the right one for you is going to depend on your spending habits. Here’s my rule of thumb.
Rewards points: A rewards program can suit high spenders, but check the annual fee attached to the program first. Our analysts have calculated that, once you take into account the annual fee charged on most rewards cards, you need to spend around $18,000 a year in order to benefit from the reward. Some banks are starting to introduce debit cards with rewards attached Citibank and Bankwest both have them which could be a cost-effective option.
Interest-free days: If you’re a savvy shopper who doesn’t spend enough to justify a rewards program but does pay their card off in full each month, a long interest-free period can help you make the most of your money. That way, you can potentially buy on credit, leave your cash sitting in a savings account or mortgage offset account and then pay your card off a few days before interest would start accruing.
Low rates: With the average credit card carrying an ongoing balance of $3000, a low rate card will suit most. If you don’t pay your card off in full each month, then forget interest-free periods (because you don’t use them) and forget rewards points (with the generally higher interest rate) and go for a low-rate card instead. That way, you’re paying the least amount of interest possible, which will help you pay the card off sooner.
Justine Davies is finance editor and commentator with financial research and ratings firm Canstar.
> Gen X – Bruce Brammall
IT’S time to lay the (credit) cards on the table. We’ve had a national “sorry” day. I believe it’s now time for a national, annual “thank you” day. And today is perfect! One week after April Fool’s Day!
Our credit card “fools” need some recognition. They shout the rest of us, who use credit cards properly, hundreds of dollars in free perks every year.
Who is thanking whom? On Thank You Day, credit card “transactors” are handing out free hugs to “revolvers”. Bless you!
Transactors pay off their credit cards each month. They never pay interest. Like Dire Straits, they get money for nothing by way of rewards points. They pay off their credit cards from their offset accounts on the last day.
Revolvers don’t pay off their credit cards each month. Most months, they pay interest. At up to 25 per cent.
By paying exorbitant interest rates, revolvers pay for the entire system, including all the free points, and holidays, enjoyed by transactors.
Sure, revolvers get points too. But if you pay interest on your card, understand that the interest rate is not only ridiculous but means you’re also shouting the person sitting next to you. Rewards points, on average, are worth about 0.5 per cent of a purchase. Spend $1000 and the points you earn are worth, roughly, $5.
Given the above, it’s pretty simple.
If you pay off your credit card in full every month, take interest-free days and rewards programs. If you don’t, then get a card with the lowest fees and interest rate you can find.
Happy Thank You Credit Card Fools’ Day!
Bruce Brammall is the author of Debt Man Walking (debtman.com.au) and principal adviser with Castellan Financial Consulting.
> Baby Boomers – Mark Bouris
YOUR personal habits will dictate what’s most important to you in terms of credit card features. To keep it simple, you usually want a good combination of a low interest rate, a high interest-free period and low or no annual fee.
Generally, credit card users fit into one of two categories:
Person A uses a credit card for household and work-related expenses. They pay their balance in full every month and always pay during the interest-free period. If you’re Person A, the most important features for you are a longer interest-free period (55 days or more) and a low (or no) annual fee.
Person B uses their credit card frequently and they often have to pay the balance off over several months. Without a credit card, they would have trouble managing their expenses. If you’re Person B, what you really need is a no-frills low interest rate card, and generally you can find one with a rate of 10-13 per cent.
A lot of people are wooed by rewards, but make sure you know what you’re getting into. If you spend $1000 or less on your card per month, chances are the card’s annual fee is higher than the value of the rewards. If you’re a Person B type, do not be swayed by rewards. Many of the better programs come with interest rates of 19 per cent or more, which means you’ll likely pay much more in interest than you’ll gain in rewards value.
Canstar released a report last month that compared 109 cards and 139 reward programs based on three levels of spending: $1000, $2000 and $5000 a month. It can be downloaded off their website. It’s amazing how much you can save just by shopping around and finding the right fit.
Mark Bouris is executive chairman of wealth management and advice firm Yellow Brick Road.
> Retirees – Kerrin Falconer
RETIREES will recall an era before credit cards. It was a time when you had to get to the bank before close of business on Friday afternoons.
There were no ATMs. Bills were paid by cheque and when buying from a retail store you needed cash the cold, hard variety.
If you couldn’t afford it, you generally couldn’t get it. The extent of debt was usually a mortgage and maybe an overdraft if you owned a business.
More than 40 years later, hardly anyone pays cash for anything over $10 and credit card debt is a massive $48 billion. Cards that are well managed and kept on a short leash can be beneficial but for those who are prone to losing track of spending, due dates and payments, debt can accumulate faster than Cyprus can close its banks.
So the first thing to work out is if you should have a card at all. Not all credit cards are created equal, so if you have a card it should suit your own personal spending habits and financial situation, which means you need to do your homework.
Some come with annual fees, others with interest-free days, reward points and all have varying interest rates. Comparing features is like comparing private health insurance offerings as easy as flying to the moon.
If you pay off the total amount each month, then a card with a long interest-free period may be best. If you don’t usually pay off the debt each month, a low interest rate card may work best.
Websites such as moneysmart.gov.au and ratecity.com.au have some valuable information and rate comparisons.
Kerrin Falconer is a finance writer with more than 15 years of financial planning experience.