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Credit Cards And Interest

Greg Medcraft
15th October, 2015

Credit cards remain a hot topic for discussion as the Senate inquiry continues into the disparity between the cash rate set by the RBA and interest rates on credit cards. It is a timely reminder to assess your own situation and take steps to minimise your credit card debt.

Interest rates on credit cards are generally high compared to other forms of credit. The interest is calculated daily and compounded monthly.

For example, let’s say you have a revolving balance of $10,000 on your credit card which has an annual interest rate of 19%. Your daily interest rate is 0.052% (19 divided by 365):

  • Day 1 – interest is calculated by multiplying $10,000 by 0.00052 = $5.20
  • Day 2 – you make a purchase on your credit card to the value of $500. Interest will then be calculated on your total outstanding balance ($10,500 x 0.00052 = $5.46)

Each day going forward, your interest will be calculated daily and then billed at the end of the statement period. This amount will then be included in the daily interest calculation until it is paid off in full.

Based on the example above, it is easy to see how credit card debt can escalate and even spiral out of control.

Before borrowing money in any form, always think about whether you can afford the repayments. Personal circumstances can change and significant debt could cause you financial hardship in the future.

It is also a good idea to limit the number of credit cards you have. Many credit cards have annual fees and having more than one credit card means you may be paying extra fees for no good reason.

Consider alternatives to getting what you want without using your credit card, such as saving or putting it on lay-by and gradually paying it off. “Interest-free” deals can also be a good option, as long as you make sure you repay the total amount in the interest-free period.

Be wary however that many of these deals offered by retailers will require you to sign up for a credit card. Make sure you factor in fees and assess whether the benefit will outweigh the costs. Interest-free deals shouldn’t be confused with the interest free ‘period’ offered on many credit cards. See ASIC’s MoneySmart page on interest-free deals and choosing a credit card for further information

You may think spending up on big things is what gets you into trouble with money, but often it is the everyday little things that end up costing more over time.

ASIC’s MoneySmart website provides trusted and impartial guidance and online tools for Australians on issues relating to money and finances. Try our budget planner to help you work out where your money is going or the TrackMySpend app—available on all smart devices— that lets you track your personal expenses on the go.

Greg Medcraft
Chairman
Australian Securities and Investments Commission

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