The real costs of credit card debt
New Zealanders spent more than $36 billion on their credit cards in 2016. And because so many of us are slack at paying off our balances at the end of each month, it led to a whopping interest bill.
Jose George from financial services research agency Canstar says about 63 per cent of credit card spending ends up incurring interest, with an average interest rate of 19.24 per cent.
In the hands of careful ‘‘conscious’’ credit card users who pay off their balances at the end of each month, credit cards are the perfect cash management tool, says George.
But the big picture shows plenty of people aren’t so careful, and many people should take a long, hard look at whether the card in their wallet or purse is the one that minimises their costs, or maximises their rewards.
‘‘With an interest-bearing spend of $22.9 billion in 2016, it becomes very obvious why it is so important for consumers to make the right decisions about which credit cards they use,’’ says George.
But the choice is bewildering, with more than 45 credit cards on offer from banks and mainstream financial organisations. The costs and rewards schemes vary widely.
Ordinary credit card interest rates currently range from 12.69 per cent to 25.99 per cent, though that excludes Bank of New Zealand’s Home Advantage card, which charges a home loan rate (currently 5.79 per cent) to those who have a home loan with BNZ.
It also excludes the balance transfer offers banks offer at this time of year to win customers from their rivals, offers that have reached new levels of generosity.
Kiwibank, for example, is offering to charge zero interest for 12 months to people who get one of its low-rate credit cards and move their debt across to it from a rival card issuer.
With so much choice, there’s a card for everyone, but George warns: ‘‘Chose the wrong card and it could have a massive impact on how you can manage your daily finances.’’
‘‘To figure out which card or cards offer the best deal, consumers need to consider what type of credit card user they are,’’ George says. ‘‘After that, choosing the right card becomes a lot easier.’’
For cardholders who can put their hand on their heart and say ‘‘I pay balance off in full every month’’, the interest rate on their card doesn’t really matter.
They could go for a card with no, or low, annual fees, such as Kiwibank’s Mastercard Zero.
But these super-prudent cardholders are in a perfect position to reap the benefits of credit card rewards schemes, especially if they are using the card as their main spending tool.
The decision is which of the rewards schemes works best for them. The really big spenders, notching up $24,000 or above, may want to seriously consider getting a platinum credit card, which have higher annual fees but rewards are earned much faster.
Canstar has an online calculator that lets people plug in their annual spend, and it will show them the rewards they would get through the different schemes.
All the former BNZ credit card holders who switched last year to Westpac when the bank won the right to partner with Air New Zealand for rewards showed that you do not need to have your credit card with the same bank as your mortgage or transaction account.
For those who do not carry credit card debt over from month to month, choosing instead to use their credit cards rarely, or keep it for emergencies only, a no-frills, low-fee or no annual fee card makes sense, George says.
Paying to be in a rewards scheme is unlikely to work for them because the ongoing cost will outweigh the potential rewards earned.
People who carry debt over from month to month are bank shareholders’ favourite class of cardholder.
They are the cardholders with most to gain from the balance transfer offers, or from switching to a low interest credit card, though it is hard to see 12.95 per cent as low, which is the lowest rate on the market from the Cooperative Bank.
If a cardholder is carrying debt from month to month, they should not be thinking about rewards schemes.
Instead, they should be aiming to get debt-free and joining the ranks of the more financially astute.