Why it pays to know more about your credit card and why too many pay too much

Today we have a dizzying choice between 250 credit cards offered by 100 different brands, albeit with 80% issued by the big banks, and credit limits exceeding $10,000.

It seems hard to believe amidst all the hullabaloo about credit cards and exorbitant interest rate charges that we’ve only had them since 1974.

Many FiftyUp members have grown up with these ingenious financial instruments which make spending so easy and started off with credit limits of just $300!

But there’s $48 billion outstanding on the plastic with $34 billion racking up interest at an annual average rate of almost 20% so someone is paying to keep the big banks rich. Is it you?

Do you know how you credit card rate compares with others?

Click here to answer our snap poll and see how your credit card rate compares to others

There’s a Senate inquiry poised to drill into credit cards and especially the inexplicably wide gap between the cash rate, as set by the Reserve bank, at 2% and those interest rates ten times higher.

Cards are unsecured loans and not comparable with mortgages but this ‘spread’ as the bankers call it used to move much more in line with the official rate until four years ago.

An internal Treasury report, prepared for Joe Hockey, unveiled thanks to Freedom of Information laws, tell us more about our love/hate relationship with credit cards.

In their polite political language the Treasury boffins say the credit card rates have been ‘unresponsive’ to falling bank funding costs ie as the cash rate fell they stayed still.

Around 30% of cardholders, called ‘revolvers’ in bank-speak, report paying interest however their share of the outstanding balances which are charged interest is more than two-thirds.

So given it’s fairly easy to switch cards, and there’s the incentive of much lower interest rate charges of 14% on the no-frills versions, why are so many consumers seemingly rusted on?

Treasury seems to be saying the banks compete with the rewards, prestige of swanky-looking cards and supposed benefits of balance transfers instead of anything as ordinary or important as the actual interest rate.

The Treasury report says the best thing to do is make us aware of the diversity of low-rate offerings in the market and encourage us to switch the most competitive.

Here are 5 Things Consumers can do to keep the Credit Card Industry Competitive

1) Switch to lower-rate cards. Points, rewards etc are nowhere near worth it if you’re facing 20% interest rates. In years we may have number portability for cards as we do for mobile phones but expect the banks to drag the chain

2) Do not ABUSE credit cards. Yes, there are some people who are so over-extended and can’t get funds from elsewhere who rely on pushing their cards to the limits. But its cards which can breed an impatience with a I-want-it-now attitude,  an all-too-easy access to credit and a fondness to buying stuff we might not be able to afford.

3) Use balance transfer offers to pay it down, not just to move it on

The offer to switch cards and move your outstanding debt over to another credit provider can be enticing with interest-free periods etc. If it helps you consolidate and reduce debt that’s a plus but would-be jugglers can come a cropper with a Greece-style reluctance to address their root problems.

4) How many cards do you need? There are some 50 million credit and debit cards on issue in Australia.If you have more than one credit card do ask why. There are annual fees and the risk of not always paying on time and hence accusing interest and charges. Many have a ‘combo’ credit card which allows use as a debit card too.

5) Compare how much your card costs you with others.  Compare annual fees, interest rates for outstanding balance, penalty fees for late payment and other breaches including exceeding credit limit, foreign currency exchange charges (beware online shoppers) and any others. Add up the annual cost and see how it compares with other offers especially from smaller banks.

It’s hardly revolutionary but for the ‘revolvers’ at least at present it’s the best advice going… apart from suggesting anything as old-fashioned as not over-using credit cards.