Ever got stung by credit card fees? Yep, we know that feeling. Turns out most of it comes down to not reading the fine print. Finance pro Jeremy Cabral, publisher of credit card comparison website CreditCardFinder.com.au, says, “Glossing over the terms and conditions and ignoring the fine print is not a wise move as you could be agreeing to pay more than you can afford and end up forking out hugely on additional charges and fees.”
Jeremy believes that because we don’t understand all the terms associated with credit cards, we tend to skip over them n the hope that it won’t matter down the track. Guilty! So here’s a quick rundown to the most commonly misunderstood terms associated with credit cards so we can get credit card savvy!
1. Cash Advances
A cash advance refers to using your credit card at an ATM to withdraw cash. Cash advances have many costs associated to them so it’s important to understand these when applying for a credit card. From the moment you withdraw cash, you will be charged a cash advance fee and higher interest (typically upwards of 20% p.a.) on the withdrawal.
A cash advance fee is applicable when transferring or withdrawing funds from your credit card via online banking, ATM, phone banking, or branch. With certain providers a cash advance is applicable when purchasing foreign currency, travelers cheques and online gambling.
2. Interest Free Days
Interest free days refer to the maximum number of days you won’t be charged interest. If your card has a certain number of interest free days, it doesn’t mean you’ll get the full amount of these interest free days, as it depends in your billing cycle.
For example, if you have a 55 days interest free card and your credit card statement starts on the 1st of each month and ends on the 30th of each month, due to your 55 interest free days your card will be due on the 25th of the next month, meaning there is a total of 55 days interest free.
If you made a purchase on the 1st April, you get the full 55 interest free days. Since no interest will be charged from the 1st of the month to the 25th of the next month. However, if you made a purchase on the 20th of April, no interest will be charged till the 25th May, which means only 35 days interest free.
You must make the minimum repayment each month otherwise the interest free day feature will not be applicable.
3. Balance Transfer
A balance transfer credit card allows you to transfer your existing balance to another institution that is not funded by the same bank, allowing you to repay your balance at a much lower rate for a set term. It is crucial that you are aware of the set term for the balance transfer because if you are unable to pay your balance by that time, the interest rate will return to the standard variable interest rate or the cash advance interest rate set by the provider.
4. Revert Rates
When you balance transfer to a card, make sure you know the rate it reverts back to once the balance transfer period is finished. This is a crucial step as it can either go back to the cash advance rate which is usually 20% p.a. or to the original purchase rate of the card.
For example, someone with a balance of $3,000 who just balance transferred to a card with 0% p.a. for 6 months will then have 6 months to pay off the balance on the card to avoid interest charges after the balance transfer period ends.
If the cardholder has not paid off the balance on the new card, in some cases it will revert back to the cash advance rate which is significantly higher than the standard purchase rate. At a cash advance interest rate of 21.99% p.a. with a balance of $1,500 on your card if you only paid the 3% minimum repayment you would be paying $1,621 in interest over 9 years and 10 months.
First priority should be to pay off the balance by the end of the balance transfer period. The sooner you pay off the balance, the quicker you can avoid the interest charges. You can plan ahead on how to meet your repayments by the end of the period.
5. International Transaction Fees and Online Shopping
Any purchases which are made in any currency apart from Australian Dollars will bring with it an international transaction fee. This can be a fee of 2 to 3% of the transaction amount depending on the card scheme.
Consumers should bear these fees in mind when travelling overseas but also when shopping online. If you like to purchase items from overseas retailers, this could apply to you.