Money
Christmas credit
Introduction
Pick the right payment method for your spending habits and you can save on interest and fees.
Credit cards have become a fee fiesta for banks - after the Christmas spending binge last year, Kiwis owed around $3.36 billion in credit-card debt.
Here are some tips on how to stop giving banks and lenders too generous a Christmas present.
What kind of spender?
Personality makes a big difference when it comes to avoiding interest payments and maximising interest-free periods and card rewards.
Most people are either savvy or carefree spenders: do you always pay off your credit-card balance each month? Answer "yes" and you're a savvy spender; answer "no" and you're a carefree spender.
Savvy spender
Only 30 percent of credit card debt is paid off in full each month - by savvy spenders.
Controlled spenders like you don't need to worry about interest rates because you always pay your debt within the interest-free period.
You should look for a card that offers your preferred type of reward, a suitable credit limit and the lowest fees.
The more you spend on your card, the more rewards you'll get - so you're better off using your credit card rather than cash.
See Credit cards for a comparison of rewards and fees for bank credit cards.
Carefree spender
Seventy percent of credit card debt isn't paid off in full each month. If you're one of those carefree spenders, you need to consider not only the purchase price but also credit interest rates, fees, and interest-free periods.
Imagine you've just found the perfect present. As you reach for your credit card you notice a sign blinking "Get your in-store credit card". Your hand hesitates and you look to the counter where another sign catches your eye "Buy now - pay later".
What do you do?
"Buy now - pay later" sounds good but often any savings you make from a long interest-free period are swallowed up by an inflated purchase price. And when you read the small print, you may find you'll be hit with high interest rates if you don't pay it off within the interest-free period. Only take on this kind of credit if you can pay it off before the high interest kicks in ... and if the purchase price isn't higher than elsewhere.
See our comparisons of fees, interest rates and interest-free periods on credit cards and store cards to find the best card for you.
Store cards
While a few stores offer good deals (Wellington department store Kirkcaldie & Stains charges no interest or fees and GE Creditline offers various interest-free and deferred-payment promotions), you're more likely to pay higher interest rates on store cards than on bank-issued credit cards. Compare fees and rates with other forms of credit and make sure you're not paying more than you should.
Guide to the table
Our data taken from a survey in September 2008.
- Days interest free assume the balance for the previous billing cycle has been paid off in full; the interest-free days are then calculated from the start of the next billing cycle until the due date for payment.
- Annual fee may sometimes be waived or reduced in the first year.
A = interest-free periods and deferred-payment options vary throughout the year depending on the store's promotions. Rewards programme
B = card gives access to store-promotions such as members-only discounts.
Credit cards
There are lots of bank-issued credit cards. We looked at higher-interest cards with rewards and lower-interest cards without rewards.
Reward cards are good if you pay the entire balance on time. But if you're just $1 short, you won't get the interest-free period - the bank will charge you interest on the whole of your balance until you pay it off. Remember these cards charge higher rates, too.
Carefree spenders are better off changing to a low-interest card (probably without rewards) and carefully managing your spending and repayment levels until you get your balance under control.
If your debt is large, transfer it to a personal loan (but check fees and interest rates), cut up your credit card, and use an Eftpos or debit card instead (see our "Credit-card repayments" table below).
Guide to the table
Our data taken from consumersaver.org.nz, which is updated weekly (data are at 21 October 2008). Note: Table does not include every bank-issued credit card.
- Interest rateA = charged at the higher rate on cash withdrawals only; this interest rate is charged separately from any interest on outstanding purchases (the lower rate) and does not apply to purchases that are not outstanding.
- Days interest free assume the balance for the previous billing cycle has been paid off in full; the interest-free days are then calculated from the start of the next billing cycle until the due date for payment.
- Annual fee some card issuers waive or reduce the annual fee in the first year.
Guide to the table
Our data taken from www.sorted.org.nz and assumes a balance of $3000.
What about cards that reward repayment?
ANZ has recently launched an Everyday Rewards Visa card that gives you reward points when you reduce your credit card balance and when you pay off interest, monthly fees and cash advances.
This card is a higher-interest one. So carefree spenders should treat it like any other higher-interest card - avoid it! But if you're a recovering carefree spender and you're looking for an incentive to keep you on the straight and narrow, it might be worth considering.
Cash, Eftpos or debit cards
These are the best option for carefree spenders as they don't accrue interest. Try leaving your credit card at home and paying with cash instead - it's easy to hand over a card when you buy something, but you may think twice before handing over cash.
If you need to purchase something online or over the phone, limit your withdrawals to the amount you have in your bank by using a debit card instead of a credit card.
What's a debit card?
Visa and MasterCard debit cards are a lot like credit cards and are accepted in the same places. You can also use them to make internet and telephone payments, and account and service fees often apply. The big difference is that there's no credit attached to them - debit cards take money straight from your bank account, just like an Eftpos card does.
Currently only Westpac offers a debit card, although Kiwibank, BNZ and The National Bank say they have debit cards in the pipeline. Debit-card use has soared globally: in 2006 it accounted for more than half of Visa's total transactions.
Prepaid debit cards
These operate like standard debit cards, but instead of having them linked to your bank account you pre-load them with cash. They're easy to get - you often don't need any ID and there's no credit check. But make sure you find out about any fees you may be stung with. NZ Post's Loaded card has a long list of fees including a $25 "per occasion fee" for a negative balance.
Case studies - carefree and savvy
Carefree Leigh ... too carefree
Leigh spends her spare money on sports and overseas travel. She has a lower interest (14.9%) National Bank Visa card with an annual fee of $78. She also has a Qantas ANZ Visa Classic card (annual fee $65), which she doesn't use because the interest rate is too high.
She pays back $500 a month on her card but finds that online rugby-ticket purchases and plane tickets keep her balance at around $1000 all year.
She pays roughly $160 in interest each year - and this, together with the annual fee, means she's paying $238 per year for the card. If we add on the annual fee she pays for her never-used ANZ card, that figure creeps up to $303 per year in credit-card costs.
Leigh has enough money to pay off her balance but hates digging into her savings account, which has an interest rate of 8%. At that rate and after tax (39% marginal rate), Leigh's $1000 investment will earn her just $49 in interest.
Leigh is paying $254 more a year by keeping her $1000 in savings and not paying off and managing her credit cards better - that could pay for a few Christmas presents.
Stefanija could be even more savvy
Stefanija is a busy accountant who actively manages her three credit cards. She changes cards as her reward preferences change and she doesn't worry about interest rates because she pays off her cards each month.
Currently she has a BNZ GlobalPlus MasterCard to collect airpoints, a Diners card to collect Fly Buys rewards and a National Bank Thoroughbred Visa card ... just in case.
Although she doesn't pay any interest and she maximises her rewards by putting as much as she can on her credit cards, Stefanija could spend a little more time looking at the annual fees she pays.
With multiple cards come multiple fees - she could save by consolidating her spending into one card or she could swap her "just in case" National Bank Visa (with an annual fee of $45) for a card with no annual fee if you use your card every three months (such as Kiwibank's MasterCard Zero).
Debit-card urban myth
Stefanija told us that when she goes overseas next year, she plans to get a Westpac Debitplus card as she's heard that they don't incur international transaction fees. But this isn't the case.
Westpac charges the same international transaction fee for debit cards as it does for credit cards - 2.5percent. However, if you use it within the Global Alliance Group in their respective countries, for example Westpac in Australia or Deutsche Bank in Germany, you don't have to pay ATM fees ($8 for cash withdrawals and 60c for enquiries).
Credit-card traps
- Overseas shopping costs: Thinking of going to Sydney for your Christmas shopping? With some bank-issued credit (and debit) cards every purchase you make overseas attracts two fees: the bank's fee and a fee charged by the credit-card company.
Overseas purchase fees typically add up to 2 to 3 percent of the purchase price - so if you spend $2000 on presents you'll pay $40 to $60 in extra fees. - Part payment: If the bank doesn't get the full balance by the due date, it charges interest on the whole amount. One way to avoid this is to set up a direct debit to pay the outstanding amount in full each month - but make sure that you have enough in your bank to pay it. Raewyn Fox, the CEO of the NZ Federation of Family Budgeting Services, told us that they often heard of people getting hit with steep penalties for defaulting on their direct debits.
- Card-payment surcharges: Traders can charge you a higher price if you pay with a credit card - this practice is common among taxi and rental-car companies.
- Cash advances: Avoid making cash advances on your credit card. There's no interest-free period on cash - you pay the interest from day one.
More information
- Sorted - www.sorted.org.nz
- NZ Federation of Family Budgeting Services - www.familybudgeting.org.nz Freephone 0508 Budget
- Latest rates: credit cards - www.consumersaver.org.nz
More from consumer.org.nz
- Credit cards (best cards for flights, shopping vouchers and cash back)
Report by Krista Matheson