Many banks are now offering credit cards with a honeymoon period on interest rates for balance of transfers of debt, to entice the most profit type of customer they have, the ones that never clear their balances every month.
Credit cards with honeymoon sweeteners on balance transfers can help you keep to your budget but if you don't abide by the rules you can end up paying more in interest - which is why the banks love them.
Denis Orrock, the general manager of researcher InfoChoice, says most balance transfers are not paid off within the timeframe of the low interest deal. Worse, such low offers can encourage consumers to be reckless with their spending.
"Interest free is never totally interest free for most people. Over time, they start paying interest," Orrock warns.
There are 26 cards with interest rates under 10 per cent, says Andrew Willink, the managing director of Cannex, with several of these offering zero interest on balance transfers as well as new purchases.
"The card issuers are looking for market share. They want consumers to take on these new offers, put their cards in their wallets and use them," Willink says.
For consumers using these products, the challenge is to work out a hierarchy of rates to avoid being tripped up.
Mike Ebstein of MWE Consulting says growth in credit cards is declining and points to a shift in consumer behaviour, with people now using debit cards more frequently than credit cards.
"Credit card issuers are competing against each other and against other payment methods, such as debit cards, charge cards, store cards and cheques," Ebstein says.
Rod Hyde, the head of consumer finance at HSBC, says his bank is offering zero interest on balance transfers and new purchasers "in response to customer research".
"Our customers are saying that's what they want to see," he says. "Our card meets their value needs."
In a way, Hyde is right: consumers like access to someone else's cash without the worry of high interest charges if they can't meet their repayments.
Hyde's offer, though, isn't a permanent one. And it comes with strings attached. The HSBC Visa card has an annual fee of $39 and late payment fees of $30.
If you transfer your balance to the card and don't pay it off before October 1, the rate jumps to 15.95 per cent. This is also the rate charged for cash advances. After October 1, any balance you carry from purchases made during that month attract interest at the revert rate to 11.95 per cent. The offer is only for new cardholders and expires on February 28.
Members Equity Bank and Community First Credit Union also compete in this end of the market. Community First has a Visa card with a 9.50 per cent rate. It does not allow balance transfers. The card has a $30 annual fee and a $30 late payment fee.
Credit cards with honeymoon sweeteners on balance transfers can help you keep to you budget but if you don't abide by the rules you can end up paying more in interest - which is why the banks love them.
Denis Orrock, the general manager of researcher InfoChoice, says most balance transfers are not paid off within the timeframe of the low interest deal. Worse, such low offers can encourage consumers to be reckless with their spending.
"Interest free is never totally interest free for most people. Over time, they start paying interest," Orrock warns.
There are 26 cards with interest rates under 10 per cent, says Andrew Willink, the managing director of Cannex, with several of these offering zero interest on balance transfers as well as new purchases.
"The card issuers are looking for market share. They want consumers to take on these new offers, put their cards in their wallets and use them," Willink says.
For consumers using these products, the challenge is to work out a hierarchy of rates to avoid being tripped up.
Mike Ebstein of MWE Consulting says growth in credit cards is declining and points to a shift in consumer behaviour, with people now using debit cards more frequently than credit cards.
"Credit card issuers are competing against each other and against other payment methods, such as debit cards, charge cards, store cards and cheques," Ebstein says.
Rod Hyde, the head of consumer finance at HSBC, says his bank is offering zero interest on balance transfers and new purchasers "in response to customer research".
"Our customers are saying that's what they want to see," he says. "Our card meets their value needs."
In a way, Hyde is right: consumers like access to someone else's cash without the worry of high interest charges if they can't meet their repayments.
Hyde's offer, though, isn't a permanent one. And it comes with strings attached. The HSBC Visa card has an annual fee of $39 and late payment fees of $30.
If you transfer your balance to the card and don't pay it off before October 1, the rate jumps to 15.95 per cent. This is also the rate charged for cash advances. After October 1, any balance you carry from purchases made during that month attract interest at the revert rate to 11.95 per cent. The offer is only for new cardholders and expires on February 28.
Members Equity Bank and Community First Credit Union also compete in this end of the market. Community First has a Visa card with a 9.50 per cent rate. It does not allow balance transfers. The card has a $30 annual fee and a $30 late payment fee.
A spokesman, Kerry McMorrow, says it offers customers three cards and each meets specific needs. But the credit union's philosophy is to offer cheap credit with few frills.
Members Equity's MasterCard has a 10.99 per cent rate, a $30 annual fee and a $25 late payment fee. The bank's executive manager, Tony Beck, says there are two groups of customers: those who carry a balance each month and those who pay off their card in full when their statement arrives. If you carry a balance, you are known in the industry as a revolver. If you pay it off, you are a transactor.
"People interested in a low-rate card are the ones most likely to carry a balance forward every month," Beck says. "It's these customers who are the most profitable for the banks. If you are paying your card off on time in full, then you don't really care what the interest rate might be.
"But once the banks get people in on a low rate, then it's very likely those people will end up paying some interest on their card in the future."
Beck says consumers need to watch out for high late payment fees. The fees are charged on top of the high interest rate you'll pay for carrying a balance from one month to the next, once the honeymoon period is over.
Also, find out the reversion rate, or the interest rate that you will be charged once your interest-free period is over. And watch out for over-the-limit fees. Beck says people who accept a low credit limit to keep spending in check may easily breach it, triggering a nasty fee.
GE Money is also luring consumers with a zero interest rate card. A spokesman, Keith Ritchie, says the GE MasterCard has six months interest free on new purchases and 4.99 per cent interest on balance transfers. The deal is only for new cardholders and starts from the time you get the card.
"There are lots of card companies out there doing nothing," he says, referring to the plethora of high-interest rate cards still on the market. "We have been competitive in terms of what we offer customers from day one."
The GE card comes with a $58 annual fee and if you miss a payment, or make a late payment, you'll pay an extra $30.
At the end of the six-month honeymoon period, the zero interest rate on purchases reverts to 9.99 per cent, as does the interest charged on your balance transferred from another card. If you take cash advances, you'll pay 18.49 per cent.
BankWest also has a zero-interest deal on purchases and balance transfers that runs for four months. After that, its reversion rate is 13.74 per cent and its rate for cash advances is 20.49 per cent.
Willink says many people apply for such cards to provide an emergency buffer against unexpected events: "A lot of people think having a low rate card in their wallet would be fantastic for that rainy day. But you also must be disciplined.
"You have to keep making repayments, even when the interest rate is zero, and get the card paid off as soon as possible. If you don't, you will find yourself paying off a debt - a debt that should have been a small debt - for 25 years."
Source: The Australian
