The Pains and Gains of Owning Credit Cards

Christmas is round the corner and the Australian love affair with the plastic credit instrument is back with a vengeance! While many economists insist that the volume of debt that will be accumulated by individual customers this season will not match that of the preceding year, there is no doubt that debt will be accumulated—however conservatively. There seems to be a general conviction that the recession is on the wane and that the economy is on the rebound. So consumers who had switched to debit cards during the financial crisis are back swiping their credit cards.

The bottom line for the consumer is credit that is easily accessible. But what is the bottom line for the credit card company? They get interest and charges and the consumer pays, of course!

Did you know that most credit cards provide about 13 types of revenue yields to credit card companies? A 10% interest rate credit card seems more attractive than 18% interest rate credit card on the face of it. However, the 10% credit card could prove to be more expensive than 18% credit card if you add up the other charges—hidden and evident!

Most credit card companies offer low repayment facilities. This repayment can be as low as 1.5% of the amount due or $25 whichever is higher. This may give the consumer a sense of security, but in reality is a debt trap. You will end up paying several times more than what you owe!

Many credit card companies tell you that the most attractive feature about their card is that you can transfer balances to their card. Well that is the carrot. The ones that offer you a zero percent interest rate on balance transfers are the ones whose offer has to be examined with care. You cannot ignore the fine print. Any payments you may make to your credit card are first applied to the balances you transferred and then later to the amounts you tot up on the card subsequently. Moreover, credit cards with interest free periods are suspect. You need to check out how the interest is calculated.

You should also be aware that credit card issuers may promote one rate but they can charge you up to three different rates on a card. The best or the headline rate is for purchases. A higher rate (up to 27.99%) may be charged for cash advances and a higher rate for fee repayment and arrears.

So if you are swiping your card this Christmas, do not be an ostrich. Understand what you are letting yourself in for!