What is your credit card costing you
Updated: Aug 5
Easy or fast are never good options when it comes to credit. Nowhere is this more obvious than in high interest credit cards.
As any reader of this blog will know, the RBA’s current cash rate is at a record low of 0.25%. This roughly equates to what it costs the credit provider to borrow their money. They in-turn, add a margin and lend the money to you, the consumer. This translates to home loan fixed rates as low as 2.19% and variable rates about 2.60%. These rates are of course very cheap and very attractive.
These record low home loan rates are heavily publicised by lenders however, you will notice they have been very quiet on their credit card rates. Many, in fact most, credit cards have not reduced their rates over the past few years of declining cash rates. This means some cards charge rates as high as 24.99%. While most are not this bad, there really is no excuse to charge rates above 14%, which is where the vast majority of credit cards currently sit.
In my humble opinion this is clearly price gouging and is illegal. Unfortunately, this is a very difficult case to prove and harder to prosecute, so is left largely unchecked by regulators. In saying this, ASIC has prepared REP580 which is a “review” of credit card lending between 2012 and 2017. The report is interesting and clearly highlights the cost of credit card debt to Australian families and to our community. You can download the report here.
The bottom line is $621 million could have been saved if consumers had used a low rate card.
To get a clear understanding of the costs to a family lets look at the cost of a $5,000 limit with a pretty good credit card such as Community First 8.99% credit card compared to Commonwealth Banks 19.74% credit card.
If you made the minimum payment on the Community First card you would pay $7,625 over nearly 16 years to pay the loan back. The total interest over this period would be $2,625.
These numbers dramatically increase if you have the Commonwealth Bank credit card. You will need to pay back $23,078 (nearly 3 times more!) over the whopping 43 years it would take you to repay this loan. The total interest would be $18,078 - that's nearly 7 times the interest on the lower rate card.
The above scenario assumes you stop purchasing on the card once you reach the limit and does not take into account fees including late payment fees. These numbers become even scarier when you consider that many families have $20,000 or even $40,000 in credit card debt.
Interest free balance transfers are a trap for more consumers than it helps.
Over 30% of consumers increased their total debt when they arranged a zero interest balance transfer. This means that 1 in 3 people were worse off after a balance transfer. Even more alarming was the fact that 63% of consumers continued to use their old cards after the balance transfer. This is a clear sign of hardship and lenders should be helping these clients.
Is It Time To Consider Chopping Up Your Credit Cards?
Credit cards used to be a very convenient and safe way to purchase goods at shops. However, debit cards are now provided by all banks and card providers and are just as convenient and safe and much, much cheaper.
Similarly many of the credit cards points schemes have been proven ineffective or expensive. Not many of the points benefits actually stack up when compared to the cost of the card and the value of the points.
While some benefits such as insurance and extra warranties are worthwhile they do not make up for the costs of the high rate credit cards.
How To Get Rid Of Your Cards
The best way to get rid of your credit card debt is to start by chopping it up and not using it any more. Then reduce your spending and dedicate a larger portion of your income to repaying your credit card debt. When it is repaid close the card.
A faster alternative is to consolidate the credit card debt into your home loan. Again, close the card immediately. It is also a very wise option to set aside the credit card debt in a separate account within your home loan. Then ask Blue Zinc to calculate the repayment required to repay this portion of your loan in 3 or 5 years only.
Many people will consolidate their credit cards into their main home loan. This has the effect of rolling the short-term debt into your long-term home loan. It then takes 20 or 25 years to repay this loan, so the interest cost increases.
Getting rid of your credit card/s is the best option. How you do it will simply change the amount you save, but you will be making huge savings which ever way you go about it.
If you would like to talk to us about managing your credit cards better or getting rid of them all-together please call us on 1300 668 017, email us here or make an appointment for us to call or a coffee here.