Changes to credit card statements
MAKE sure you're sitting down before you open your next credit card statement.
New reforms mean card issuers now have to show how long it will take to pay off the card balance if you stick with the minimum monthly repayments, and you could be looking at a timeframe spanning years - even decades.
One of the hidden nasties of credit cards is the way the regular monthly payment is set at around 2% of the card balance. It means your repayments will barely make a dent in the overall debt, and chances are you could be paying off your card purchases - plus interest, for some time.
As a guide, on the average card debt of about $3,300, the monthly repayment could be as little as $67. But at an interest rate of say, 18.5%, it could take over 28 years to clear the debt. By that time you would have made repayments totaling $11,473 - more than three times the original balance.
This is the sort of information that by law must now be displayed on card statements. It can come as quite a shock - and that's intentional. Hopefully this reform will spur more people into paying a bit extra off their card each month.
This is just one of a whole raft of credit card reforms that took effect on 1 July.
Among the other initiatives, credit card issuers are now banned from making unsolicited offers to increase your card's spending limit. I reckon it's a terrific idea. Australians already collectively owe $38 billion in card debt, and it's costing the average cardholder around $800 each year in interest charges. The bottom line is that no one needs any more card debt.
The latest reforms also call for card providers to give a clear explanation of how the interest-free period works. These have always been a point of confusion, and hopefully this will make it easier to see how you can make the most of interest-free periods to get on top of card debt.
A number of the recent reforms only apply when you take out a new credit card. To begin with, credit card fact sheets must now be provided for each card, which display key pieces of information in a standardised format. This makes it easier to compare the rate and fees that apply to different cards, and it's worth asking for a fact sheet if you are shopping around for a new credit card.
You'll also be able to request your own credit limit on a new card, and this is a great opportunity to put a cap on the amount of card debt you can take on. I recommend setting a very low limit especially if you are new to credit cards.
You can no longer be charged 'over the limit' fees on a new credit card, and best of all, any payments you make will be directed to those parts of your card balance that attract the highest rate like cash advances. It's another stepping stone to paying off the card sooner.
Finally, do your homework if you are taking out a new card, and comparison websites like Canstar are very helpful for this. Credit card interest rates vary tremendously, from a low of 9.5% pa through Community First Credit Union, up to monster rates around 21% pa which can really hurt your pocket, so make sure your shop around.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.