Today heralds the dawn of long-overdue credit card reforms to bring relief to those struggling with huge debts. But experts warn that you will still have to do your homework to get the most out of the new rules and to get the best deals on cards.
One key change is to the fine print for balance-transfer cards, which had the potential to cost unwary shoppers dearly.
Imagine you are struggling to pay off your credit card debt and, faced with high interest rates approaching 20 per cent in many cases, decide to try to give yourself some breathing room by shifting $3000 of debt to a card offering an introductory low interest rate on balance transfers. You start making $800 monthly repayments, but you also make new purchases worth $500 a month. The way outstanding debt on your card is paid off will change.
Under the old regime, on most cards, that $800 you were repaying each month covered the old transferred debt – not your new purchases, which attracted a much higher interest rate. This is one example of the sneaky way banks stiffed their customers of a few bucks here and there to boost their bottom line.
Well, for new cards taken out today, providers will be forced to direct repayments to the part of the credit card debt that attracts the highest rates.
Canstar analyst Adam Beu says under the new system, about $75 and two months could be shaved off the time it would take to pay off the card in the above example. But borrowers will still need to check with their bank, credit union or building society to make sure they are applying the new rules to existing cardholders.
BUT WAIT, THERE’S MORE …
Just as the new regulations will make it harder for banks to hide nasties in their small print, they will also prevent lenders from using one of their favourite tactics – tempting us into debt. From today, banks will no longer be able to just increase borrowing limits without agreement from the cardholder. Nor will they be able to charge a fee if the limit is exceeded.
”That reform just applies to new cards, but it is going to be interesting to see how the banks handle that,” Beu says. ”It’s not in the interests of the customer or the bank for the customer to keep going over their credit limit, which some people do.”
Your monthly credit card statement will also change. One of the problems people have had is they only pay the minimum amount each month. That means their debt keeps growing. The reforms will force lenders to disclose how bad an idea this is by showing you how long it will take to pay off the debt on your card.
Canstar calculates that it could take 154 years to wipe out a $5000 debt if only the minimum amount is paid on a card with an average rate of interest. Paying $10 a month more on that debt reduces that time to 28 years. By paying an extra $20, it will take 14 years.
So the only way to bring the debt down quickly is to pay far more than the minimum. Better still is to pay off your card in full every month.
GET THE BEST DEAL
With the bewildering array of cards available, it pays to do some research (for a start, look at the best balance-transfer cards in the table at left). But there are some basic rules to keep in mind.
Beu says some credit cards have little or no annual fee, which may suit some consumers. ”Naturally, they don’t usually come with a rewards program, which many cards offer, but they may be a good option for some people,” he says.
”At the other end of the scale, we’ve seen gold cards fall out of favour. The new things are cards like Platinum Diamond, where the annual fees may be $250-$700.
”They often have a lot of bells and whistles but the question is whether you can get the value out of them.”
The publisher of website creditcardfinder苏州美甲培训学校.au, Jeremy Cabral, says you have to be quick to get the best terms as the banks will probably be altering what they have on offer in the wake of the credit card reforms.
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