This article is brought to you by ME.
Credit cards can be a useful money management tool – but only if your card is giving more than it’s taking, says industry super fund-owned bank ME.
Credit cards can be very handy in the right circumstances. They’re a far more secure option than carrying wads of cash. They’re super useful if you’re travelling overseas, and they can provide a source of emergency money if you cop an unexpected bill.
The downside is that credit cards come with costs, and it pays to be sure your card is delivering real value. One way to achieve this is by having the right card for your style of money management.
Transactors – look for a low annual fee
If you pay off your credit card in full each month, you’re what the banking industry terms a ‘transactor’. By maintaining a clean slate every month, you avoid interest charges altogether, so the card interest rate is less important to you.
What matters for transactors is the annual card fee – and even this can be avoided. Yes, some credit cards charge zero annual fees, providing extra value.
Revolvers – aim for a low rate
If you owe money on your credit card each month, you fall into the ‘revolver’ camp. As you’re continually paying interest on the outstanding balance, it’s worth minimising your costs by looking for a low-rate card.
What exactly is a low rate? Reserve Bank figures1 show the average ‘standard’ card rate is 19.07% per annum, while the average across low rate cards is 13.01% per annum.
As always, averages don’t tell the whole story. It is possible to pay much less than 13.01% per annum just by shopping around. And it’s worth the effort.
Shifting a $3,000 debt from a card charging 19% per annum to one costing 12% per annum could see you save over $1,000 in interest in five years, assuming the debt remains at $3,000 throughout this time. Having a lower rate also makes it a lot easier to get ahead with card debt as it enables you to pay more than the minimum monthly repayment.
Rewards – not so rewarding after all
It’s when you have a rewards-based credit card that you need to be very sure you’re pocketing value for money. A few small freebies can come at a big cost.
ME research found that over half of reward card holders earn rewards worth less than $50 annually. Almost two out of five say their card is costing them money instead of delivering any value.
That’s a worry because reward cards can be especially expensive. Interest rates can top 20% per annum and some annual fees run into triple figures.
A low interest rate or a low annual fee card can often be far more rewarding, delivering personal savings that you can use to treat yourself anytime without the need to chase points.
Is a credit card right for you?
No matter what type of credit card you have, if it’s encouraging you to overspend, you should consider if credit cards are for you.
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1Finder - RBA file F5 Lending Rates
This article is brought to you by ME Bank. This information does not take into account your situation and you should consider if these products are appropriate for you. For more information, please visit www.mebank.com.au.
Members Equity Bank Limited ABN 56 070 887 679.
The products or services being advertised are provided by third parties, not REI Super and therefore will not be the responsibility of REI Super. REI Super may invest in these third parties but does not receive any payments or commissions from these organisations as a result of members using the products and services. Members should make their own assessment and seek professional advice as to the suitability of such products or services for their individual needs.