Avoiding credit card traps

Credit card surcharges

You’re about to enter your credit card details and you notice the total due jumps a few dollars. Some businesses apply a surcharge to cover the cost of processing credit card payments.

Surcharges take the gloss off your bargains. Some retailers eat the fee but you’ll often be stung when you book a flight or get concert tickets.

So who sets the charges? It’s up to the card companies and the banks. Unlike in Australia and the UK, there’s no limit here on what they can charge. That means Kiwi consumers can end up paying higher fees.

Retailers should make it clear if a surcharge applies and how much it is. If you’re not told, the retailer risks misleading you about the price of the product and could face prosecution under the Fair Trading Act.

Exchange rates

When you’re shopping on an overseas retailer’s website, it’s much easier if its prices are shown in New Zealand dollars. You don’t have to work out the cost in a different currency and you avoid a conversion charge on your credit card.

Unfortunately, you’re still being stung. It’s just the merchant, which will be using dynamic currency conversion (DCC), pocketing the fee instead of the bank.

It might be a hassle, but it’s worth comparing the product’s cost in the currency of the country where the online store’s based. In our example, if you’d bought your shirts from UK-based retailer ASOS in pounds, you’d have saved $11.37.

That doesn’t mean this will always be the cheapest option. You’ll need to check your credit card’s currency conversion rate and use an online conversion tool to calculate which option works out best.

Interest-free days

Most credit cards offer 44 to 55 interest-free days. But to get the maximum allotment, you need to make your purchase on the first day of your statement period.

Check with your bank how many interest-free days you have on your credit card and when the clock starts ticking.

Be aware most cards charge interest on new purchases if you haven’t paid your balance in full.

Minimum payments

Our latest banking survey found 27% of consumers did not pay off their credit card balance every month. It can be tempting to just pay the minimum – it’s easier on your bank balance – but it’s a quick way to rack up debt.

Interest will be applied to the closing balance every statement period and is likely to be charged on every new purchase you put on the card.

All the 17 credit cards we looked at required a minimum payment, ranging from 2% to 5% of the total balance due, or $5 to $25, whichever is largest (see our Table).

If you have a Westpac Hotpoints Mastercard, or a Westpac Airpoints Mastercard, and just pay the $5 minimum, it takes 22 months to pay off your $89.13 shirt purchase. With interest, your shirts end up costing $108.

BNZ’s Low Rate Mastercard had a higher minimum payment for this purchase ($25), so you’d pay those shirts off in four months, rather than nearly two years.

But this wasn’t the case with Westpac’s Low Rate Mastercard. The card’s $5 minimum payment meant it would take 20 months to pay for your purchase. With interest, your shirts end up costing $100.

Credit card rates compared

Credit card limits

The bank writes offering to increase your credit card limit? The extra money might be tempting, but spending cash you can’t easily pay back only benefits the bank.

In Australia, banks can’t make unsolicited credit card offers and they must get the customer’s permission before upping the limit and make sure they can pay it back.

Back here, the Responsible Lending Code says lenders shouldn’t increase a borrower’s credit limit without the borrower’s consent. However, the code is only a guide and doesn’t set hard rules.

Our banking survey showed credit cards were the most common unsolicited product consumers were offered by their banks.

Consumer credit laws are being reviewed by the government. We’re calling for rules similar to those in Australia. Changes to the Credit Contracts and Consumer Finance Act are expected to be introduced this year.

Reward schemes

Banks have spent significant marketing dollars touting credit cards linked to reward schemes, such as Airpoints and Fly Buys.

Our latest banking survey found 53% of consumers with a credit card had one linked to a reward scheme. However, just 31% believed the scheme offered great value.

Respondents thought the interest rate, annual card fee and interest-free period were more important factors to consider when choosing a credit card.

If you’re not paying off your card each month, any value you get from rewards points will be quickly eroded by interest on the unpaid balance. Twenty-seven percent of consumers in our survey were not paying off their card every month.

Be aware credit card reward schemes only reward big spenders who pay their balance in full each month. Low spenders, or those with credit card debt, don’t reap the rewards.

Top tips to get your card under control

• Pay in full: partial payment means you’re paying interest – and you’re likely to be charged interest on any new purchases, as well as on any fees owing.

• Pay by direct debit: clear your whole debt in full every month by setting up a direct debit so you don’t have to worry about missing the payment date.

• Avoid minimum payments: if you can’t wipe your debt, try to pay as much as you can, not just the minimum required. You’ll save on interest and be debt-free faster.

• Consider a low-rate card: if you’re stuck with card debt, some banks offer low-interest deals when you transfer your credit card balance. To get the full benefit, you need to pay off the balance during that low-interest period.

• Budget: make a financial plan and stick to it. If you can’t afford to pay off your purchase, put the plastic away.

If your debt is out of control, take immediate action:

• Ditch the card – cut it up if necessary. Talk to your bank and get budgeting advice. Your options could include debt consolidation or setting up an automatic payment to pay it off.

• You might be able to add your card debt to your mortgage. You’ll need to increase your mortgage repayments to cover the extra and make sure you’re not just paying the debt off over a longer period.