Factsheet: Credit cards and store cards

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ONLINE TEXT VERSION - August 2011

Credit cards are a convenient form of short-term finance. Store cards are credit cards issued by particular retail stores.

Both types of card are easy to get and easy to use. With a credit card, you can carry less cash and buy things easily over the phone or online.

But if you have trouble controlling your spending on credit, you may end up owing more than you can pay off.

That's when credit cards can lead you into a dangerous debt spiral.

Ricky always pays off the balance

I sometimes use my credit card when I'm shopping or caught without cash. But I'm 100% committed to paying off the balance within the interest-free period. I'm already paying off my HECS debt from uni, so I don't want to get into more debt.

How do credit cards work?

  • Credit cards allow you to borrow up to a maximum spending limit. You can keep borrowing as long as you make regular minimum repayments and stay below the limit.
  • You usually pay an annual fee and are charged interest on all transactions if you don't pay your full balance each month. If you use a card without an interest-free period, you are charged interest from the date of your transaction.
  • Unless you use a card that is interest-free and fee-free, buying on credit will always cost you more than if you pay for something upfront with cash.

TIP: How to save money on your credit cards

  • Try to pay off the balance within the interest-free period to avoid paying interest. If you regularly pay off your credit card balance in full, shop around for a card with no annual fee or a low annual fee, rather than a lower interest rate.
  • Even if you can't pay all you owe in full, try to pay off more than the minimum repayment to reduce the amount of interest you pay. Shop around for a low-interest credit card if you know you usually have difficulty paying the credit card balance in full each month.
  • Avoid cash advances - they have no interest-free period, charge ATM fees and often incur higher interest charges
  • Limit the number of credit cards you have, especially if you can't pay them off within the interest-free period. Be aware that store cards usually charge higher interest than standard credit cards.
  • Make sure your credit card limit reflects the amount of debt you can manage. If you need to lower your limit, contact your credit provider and ask them to do this.
  • Read your statements carefully to check that you are charged correctly. You may be able to reverse a transaction if you did not get the goods you paid for. Contact your credit provider immediately if you discover any transactions on your statement that you did not authorise.

Choosing a credit card

  How it works What to watch out for

Debit cards

The most common type of debit card is an ATM or EFTPOS card. You can use this type of card to withdraw money at ATMs and make purchases.

Some debit cards, such as Visa Debit or Debit MasterCard, can be used exactly like a credit card - so you can make purchases on the internet and while overseas.

The difference is that a debit card uses money already in your bank account instead of credit, so you won't pay any interest (unless you have an overdraft).

Make sure you have enough money in your account to cover your purchase.

Some debit cards also have a credit facility, but can charge high interest if you use it. Make sure you don't end up getting into debt without planning to.

Be very careful when using debit cards on the internet or overseas where there is a higher risk of fraud.

Unlike with credit card fraud, any amount stolen comes directly from your own funds and it may take some time to get the money back into your account.

Consider limiting the amount of money available in your debit card account and make sure you always have access to other funds.

Interest-free days

You pay no interest for a certain number of days after making a purchase.

That's good if you always pay off your credit card in full within the interest-free period.

But if you don't, you could end up paying a higher interest rate and higher fees than you would with a card with no interest-free period.

There are no interest-free days for cash advances.

You will be charged interest either from the day you make a purchase or from the statement date, unless you repay in full within the interest-free period.

No interest free days

You pay interest either from the day you make a purchase or from the day your monthly statement is issued. For cash advances, interest is usually charged from the date of withdrawal.

This kind of card usually has lower annual fees and a lower interest rate than a card with an interest-free period.

This kind of card is a good choice if you know you won't be paying your card off in full straight away.

Read the conditions of use before you apply for a card to check when interest will be applied.

As with all credit cards, watch for fees such as annual account fees, payment dishonour fees and fees for going over your credit limit.

Awards cards

You receive reward points for each dollar you spend on your card. Afterwards, you can redeem your points for goods or airline flights.

Awards cards work best if you use your card a lot and pay the balance off in full within the interest-free period, avoiding interest.

Before getting one of these cards, check that you will use it enough to qualify for the rewards. There's no point buying things you don't need to earn rewards; you'll only spend more.

Awards cards tend to have higher interest rates and fees. You may be charged a fee to use the awards.

The program may discourage you from shopping around for the best priced goods and services.

If you carry over a significant balance on your card each month, you'll probably lose more in fees and charges than you gain in rewards.

You may also have to redeem rewards points within a certain time.

Store cards

Some large stores or retail groups issue their own cards that operate like regular credit cards but usually charge much higher interest.

Watch out: using store cards can be an expensive way to shop.

The interest rates for store cards are usually much higher than for other credit cards.

Before signing up for a store card, compare the interest rate with other forms of borrowing. The benefits may not be worth paying a higher interest rate.

Be careful when you get a store card as part of an interest-free deal where you buy now and pay later (see our factsheet Interest-free deals). New purchases on the card are unlikely to be interest-free. In fact, you'll pay more in interest than you would using a regular credit card.

Turn $3,000 on your credit card into a 19-year loan and double your debt!

Imagine you've run up $3,000 worth of debt on your credit card. It's a typical card: you must make minimum monthly repayments of 2.5% of the outstanding amount, or $10 (whichever is more). You've decided to stop using the card so you can pay off what you owe.

You are charged interest at 16% per annum from the date of purchase, unless you pay everything off each month. There are no fees on the account.

Of your first 2.5% minimum repayment ($75), about $40 pays interest. Only $35 comes off your debt. This means if you pay only the minimum repayment each month it will take you more than 19 years to pay off the debt.

And, during that time, you'll pay over $3,100 interest on top of the $3,000 you borrowed - that's over $6,100 in total.

On the other hand, if you pay $200 a month, you'll pay off the balance in around 18 months, and pay only $370 in interest - a saving of over $2,700!

TIP:

Remember: if an offer seems too good to be true, it probably is.

Beware of credit offers

Uninvited credit increase offers

  • Ever been offered a higher limit on your credit card? If you can't afford to pay off your balance in full each month, you'd be better off saying no to an increased credit limit offer. A higher credit limit makes it possible for you to get into more debt - and you'd end up paying a lot more in interest too.
  • If you really do need an increase to make a purchase, try and pay the debt off quickly so you can then reduce the limit to a more manageable amount.

Honeymoon rates and other incentives

  • Sometimes cards offer an introductory or honeymoon interest rate, typically for six months. Check how much the interest rate will rise at the end of the honeymoon period, and what fees and charges come with the offer.
  • A card with higher fees might negate your honeymoon savings before long. The same principle can apply to offers of no fees for 12 months.
  • Cashback credit card offers come with similar pitfalls. Cashback benefits are quickly outweighed by extra interest charges if the card offering the cashback has a higher than usual interest rate.

Balance transfers

  • With credit card balance transfers, you transfer outstanding balances from one credit card to another, often at a lower interest rate, for a defined period (e.g. 4.9% for six months). But before you make a balance transfer, read the fine print. Some possible drawbacks are listed below:
    • If you make a balance transfer, any purchases on the new card attract the full interest rate for the new credit card and will not have the benefit of any interest-free days.
    • If you use your new card after making a balance transfer, the potentially higher interest rate on new purchases and the loss of interest-free days may mean that you won't save anything by transferring your debt from one card to another.
    • When the balance transfer period is over, any remaining balance transfer amount will attract interest at the standard interest rate - and sometimes a much higher cash advance interest rate. Try to make sure you pay off the balance transfer amount within the balance transfer period.
  • Unless you have a real need to keep the second card, close the account. Remember: if you don't do this, you are likely to be paying fees on the card even if you aren't using it.

Six steps to smarter borrowing

Step 1.

Work out if you can afford to borrow

  • Before you get a credit card, use our budget planner to help you see exactly where you spend your money and how much you can afford in repayments.
  • Allow for interest rate rises and anything that might affect your future income (such as changing jobs).
  • Our credit card calculator will help you work out what you need to be paying in order to pay off your credit card debt within 12 months.

Step 2.

Shop around for the best deal

  • If you decide to get a credit card, take the time to compare interest rates, product features, and fees and charges. Even a small difference in the interest rate can make a big difference to what you have to pay. See Choosing a credit card on pages 2-3, to decide which features will suit you best.
  • Shop around online to compare products.
  • Research published by the independent consumer group CHOICE can also help you find the right product for your needs and budget - see www.choice.com.au

Step 3.

Know who and what you're dealing with

  • Check the terms and conditions of your credit card, including interest rates and penalties for missed repayments, before you sign.
  • Anyone who wants to engage in credit activities (including brokers) must be licensed with ASIC, or be an authorised representative of someone who is licensed. If they aren't, they are operating illegally.
  • There is currently an exemption from licensing for credit assistance provided through some businesses (for example, retail stores and car yards). While the store may be exempt, the actual credit provider must still be licensed. If you are unsure who the credit provider is, ask the person you are dealing with to point out the name in your credit contract.
  • To find out if a credit provider is licensed or call ASIC's Infoline on 1300 300 630.
  • Anyone engaging in credit activities (for example, by providing credit or assistance to you) must give you either a credit guide (with information such as their licence number, fees and details of your right to complain) or a written notice with details of your right to complain about their activities.

Step 4.

Keep up with your repayments

  • Make at least the minimum repayment on your credit card statement each month.
  • Make extra payments where possible, to save on interest.
  • If you have more than one card, pay extra to the card with the smallest balance so you can pay it off first and then use your money to pay other debts. If your debts are similar in size, then pay off the one with the highest interest rate first.
  • Try to pay off the entire amount owing on your credit card each month (or as much as possible).
  • Check for fees or charges if you're thinking of transferring your balance to another card.

Step 5.

Get help if you can't pay your debts

  • Act quickly if you are having trouble making repayments. It may be difficult to face the problem, but ignoring it will only make things worse.
  • If you can't make the full repayment, pay as much as you can. If you can't keep up with the minimum repayments, contact your credit provider without delay.
  • If you are experiencing financial difficulties, you have the right to apply to the credit provider for a hardship variation. If the credit provider refuses, you can complain to its independent dispute resolution scheme for a variation on the grounds of hardship (see step 6 below).
  • There are places you can go for help - visit www.moneysmart.gov.au for sample letters and information about support services such as financial counselling and legal assistance, call the National Debt Helpline on 1800 007 007 or call ASIC's Infoline on 1300 300 630.
  • See our factsheet Can't pay your debts? 

Step 6.
Complain if things go wrong

  • Try to resolve your problem with your credit provider first.
  • If you aren't satisfied, take your complaint to your provider's independent dispute resolution scheme, the Australian Financial Complaints Authority (AFCA). You can call them on 1800 931 678.
  • If you think that a credit provider has acted unlawfully or in a misleading way, you can complain to ASIC online at www.asic.gov.au or call ASIC's Infoline on 1300 300 630.

Contact us

ASIC Infoline: 1300 300 630

Disclaimer:  Please note that this is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice.

© Australian Securities and Investments Commission 2011


Last updated: 12 Nov 2018