Our team exposes some of the credit card tricks used by financial institutions, including all those hidden fees, balance transfers and tricky ways to calculate interest.
1. Cash Advances
Almost every card we’ve reviewed has a higher interest rate for cash advances than for purchases (each card in our comparison table shows both the purchase amount and the cash amount), and cash advances are a big business. According to the reserve bank, over $1 billion worth of cash advances were made on Australian credit cards in December 2008 alone.
A cash advance rate is applied if you get money out of an ATM with your card, get cash out at an EFTPOS terminal when using your card (on the credit account) and sometimes if you use your card to pay a bill with BPay.
Cash advances usually don’t qualify for any interest free period, so you’ll begin being charged interest immediately and it’s usually calculated daily. There is also sometimes a fee.
2. Minimum repayments
You use your card all month and ring up a huge debt, then receive a statement which says all you need to pay is $25. Sounds great, doesn’t it? But it’s one of the leading credit card traps.
The minimum balance can give you the illusion that your debt is manageable, but under most cards, it can take decades to clear the debt by paying only the minimum amount. In that time, you’ve probably paid thousands in interest.
If you can, ensure you pay more than the minimum monthly repayment.
3. Fees
Do you know how many different fees your bank can charge you on your credit card? It's important you check, because many of the fees are obscure and can be unexpected.
The common ones are annual fees, late payment fees and over-limit fees, but you can also be slugged for cash advances, foreign currency transfers, additional card holders, replacement cards (if yours is lost or stolen), using your card overseas, using another banks ATM, applying for a balance transfer and even making balance enquiries.
4. Partial Payments
If you make a large purchase, but pay some of that purchase off before the due date, some banks will still slug you interest on the full purchase amount. For example, if you bought a lounge for $2,000, but paid $500 of that amount before the due date, some banks will calculate interest on the full $2,000, rather than the $1,500 that remains owing. Plus they’ll continue to charge you interest on the full $2,000 right up until you pay the entire purchase off.
5. Balance Transfers
Many banks offer incentives for existing card holders to transfer their balances to a new card. This honeymoon period typically provides a lower interest rate on the balance transferred, however any new purchases made in this time will be on the reverted (and often higher) interest rate.
Also check whether the bank imposes minimum monthly payments and late fees during the balance transfer period.
6. Purchase date vs. invoice date
Some banks will begin calculating interest (or in the case of cards with interest free periods, begin the interest free period) from the purchase date, rather than from the date the invoice was sent.
Using our lounge example from above, a $2,000 lounge bought on the first day of a statement period with a card that has a 14% interest rate on purchases and no interest free days, has already racked up over $23 in interest before you even get the bill!
7. Exceeding the interest free period
If you’re card has an interest free period and you make purchases that you don’t pay for before that period expires, be careful to check how your bank retrospectively applies interest. If you exceed the interest free terms with many banks, they’ll retrospectively calculate the interest you owe all the way back to the purchase date.
8. Order of payment application
This is different for each bank and it’s important you understand how your bank applies your payments in order to get the most from any interest free periods and to avoid fees.
Some banks apply your payments to the oldest outstanding amount (i.e. in the purchase order). Some apply payments in the order they were processed (i.e. received by the bank) and some apply payments to the lowest-interest amount first. Some even refuse to clarify how they apply payments, saying it’s simply at their ‘discretion’.
9. Losing your interest
With many banks if you don’t pay the card balance in full every month, you forfeit your interest free period on any new purchases. This means that even if you pay off the majority of your balance, any purchases in the new month begin accruing interest immeadiately.
10. Double interest
Some banks will even charge you interest on the interest you owe!
