An Australian bank has revealed what the others may not want you to know about credit cards.
ME bank provided The New Daily with exclusive insights into the credit card business, including the pitfalls, to cover what this week’s bank boss hearings failed to mention.
Cards were a big issue during the televised hearings in the House of Representatives. Economics committee member Scott Buchholz, a Nationals MP, made cards his singular focus.
He came down hard on CBA’s chief risk officer David Cohen, calling him a “good boy” when he finally admitted that cash advance interest rates are much higher than regular rates. And he gave NAB boss Andrew Thorburn an ultimatum: “We can do this the easy way or the hard way.”
But there was plenty Mr Buchholz and the rest of the committee didn’t touch on. ME bank helped fill in the gaps.
Surprising cash advances
ME bank revealed that many credit cards classify more than just ATM withdrawals as cash advances.
Cash advances incur a one-off fee, as well as a higher rate of interest, calculated daily.
As revealed during this week’s parliamentary hearings, cash advance rates are always several percentage points higher than the usual rate. For example, the Commonwealth Bank’s low rate card is 13.24 per cent for purchases, but more than 20 per cent for cash advances.
ME revealed these potentially surprising cash advances:
- Lottery tickets
- Foreign currency
- Traveller’s cheques
- Gambling chips at a casino
- Transferring cash from your credit card to other bank accounts
Be wary of rewards
Australians don’t choose credit cards based on interest rates, but are attracted by other factors, especially the lure of rewards, the economics committee was told this week.
“A lot of people are attracted to” rewards cards, ANZ chief executive Shayne Elliott said. His deputy CEO, Graham Hodges, confirmed this: “They are attracted by the free insurance, the flybuy points and all the other perks.”
But it can be difficult to “come out on top” of these cards because of their higher interest rates and annual fees, ME head of deposits and transactions Nic Emery told The New Daily.
This means, you pay for the rewards you get. There may be no such thing as ‘free insurance’.
“Rewards cards can provide great benefits and some people do well out of them,” Mr Emery said. “However, to come out on top you need to ensure the rewards you receive outweigh the costs.”
Australians who are reaping rewards of a lesser value than the fees and interest they pay should consider a low-fee card with no annual fee and a lower rate, the ME spokesman said.
The ‘R’ word
Do you ever check your monthly credit card statement for suspicious transactions or overcharges? And do you look at it closely, or simply glance over it?
Bankers call this process ‘reconciling’ a statement, according to ME. They get out a pen and go through each transaction line-by-line, only ticking each one off once they’ve matched it to a corresponding receipt or invoice. You should too, the bank’s expert said.
“We recommend you reconcile your credit card purchases at every statement,” Mr Emery said.
Thankfully, if you do find any fraudulent charges, let your credit card company know and they will cover it.
The minimum payment is a bad idea
By law, banks have to tell you the minimum amount you must pay each month in order to eventually pay off your debt. But ‘eventually’ can be a very long time – and incur you many hundreds of dollars in interest.
Not only should you ignore the minimum, but you probably shouldn’t pay any less than the full amount … ever.
“It’s not a good idea to only pay the minimum off your credit card over the long-term, particularly if you’re continuing to make purchases on the card,” Mr Emery said.
“Credit cards are better used for managing cash flow with a view to paying them off in full each month or as soon as you can.”
There’s a better product
Surprisingly, ME bank openly admits you can find a much better deal on long-term debt than a credit card.
For example, if you’re about to swipe for that expensive holiday, mountain bike or new computer, and know you won’t be able to pay it off right away, think twice.
“If you need a longer-term loan for purchases you might consider a personal loan,” Mr Emery said.
“You can also use a personal loan to pay off credit card debts, often at a lower rate and with a fixed repayment plan to ensure you repay it quickly.”
ANZ boss Shayne Elliott echoed this during the hearings: “If you have a higher amount of revolving debt on your credit card [you might] be better off having that in a personal loan where the rates are lower.”