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Credit card myths – and how to spot them

There are a lot of credit card offers out there, from banks, credit unions, building societies, airlines and department stores, to name a few, but how do you identify the really good offers from the rest?

Here are a few tips to help you spot some of the credit card myths:

  • Low rate credit cards have a low rate – it’s all relative and still best to shop around. The so-called low rate card from one organisation might still have a higher rate than those from other institutions. Also don’t forget the annual fee in this equation and make sure the low rate is not just an introductory offer.
  • Low interest balance transfers are a good deal – they can be but you might find that you’ve switched to an expensive card once the honeymoon is over. Make sure you check how long the low (or no) interest balance period is and which interest rate applies after that period.
  • Reward schemes are worth a slightly higher interest rate – reward schemes are great if you pay your card off each month to avoid interest but, if you don’t, the rewards are often negligible relative to the extra interest you have to pay. Also, be careful of the monthly card fee!
  • Interest free days apply to all purchases – not true! Generally interest free periods only extend to the next repayment date. This could be up to 55 days for purchases made just after a statement cut-off date but can be as little as 10 days for purchases made just before a cut-off date. Make sure you are aware of the cut-off dates for your cards so you can manage your card activity.
  • The higher interest rate on a credit card is not significant because the debt amount is usually small – be careful, it all adds up! Even if you’re carrying forward and paying interest on as little as $1,000 each month you’d be better off drawing down on your home loan, or taking out a personal loan to pay this off, as interest rates on those loans are much lower. Avoid paying interest on your credit card and focus on paying back the higher loan as quickly as possible.
  • It’s just too tempting to spend on the credit card – the repayment pain comes later! This is not a myth and is exactly how credit card providers make money. The key is spending discipline. Credit cards are a convenient way to buy but the golden rule is to not spend what you can’t afford to pay in full when the credit card bill arrives.

^Wayne – Chief Financial Officer