Paul Clitheroe
Paul Clitheroe

Half of us don't know how Credit Card rates work

A RECENT survey by consumer group Choice found around half the nation's credit card users aren't clear about the interest rate charged by their card. I reckon plenty of people could be unpleasantly surprised if they knew just how much they are paying.

You see, while the Reserve Bank has lowered the cash rate over the past year, the benefits have flowed largely to home loan customers. Rates on credit cards have remained stubbornly high, with many cards charging around 20%. That's more than three times what you could be paying for a home loan.

High card interest rates aren't a problem for everyone. It's estimated around one in two people pay their credit card off in full each month and so avoid paying interest altogether. For these cardholders, known in the industry as 'transactors', a card with a low annual fee should be a priority.

For the remaining card users, termed 'revolvers', who carry an ongoing balance, it's essential to know the rate being charged. You'll find it on your latest card statement.

At the top end of the scale, some cards charge as much as 23%. At that rate, on a card debt of $3,000 (about the average) you could be paying annual interest of $690.

At the other end of the spectrum you could pay much less, like 9.25% with cards offered by Community First Credit Union or Greater Building Society. On the same $3,000 card balance that would bring your annual interest charge down to around $278 - a yearly saving of $412.

There's a wide selection of balance transfer offers that will, for a set period, drop your card rate to zero. However there are downsides.  The low or zero rate typically only applies to the amount transferred. New purchases can attract interest of 20%.

More worrying, with the slate cleared on the old card, there's not much stopping the cardholder from reloading not one, but two cards, with fresh purchases, potentially worsening their debt burden.

If you have a growing card debt, check the rate you're paying and see if you could get a better deal elsewhere. We can now nominate our own credit limit on new cards so if you switch to a cheaper card, be sure to keep the limit low. Cut up your current card - one card is more than enough, and let the issuer know you'd like to cancel the card or you'll continue to be charged annual fees.

If you just can't see yourself making progress with a growing card debt, it can be worth using a personal loan to pay off the balance and get rid of the plastic altogether. The fixed term means there is an end date for the debt and there's a good chance the rate on a personal loan could be less than your card rate. Mutuals like building societies and credit unions tend to offer some of the best deals on personal loans.

For more ideas of reducing card debt take a look at my recently published book Free Yourself from Debt.

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 for more information.

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