Stress-free holiday spending

SMH - Money - December 7, 2011

Caught in a credit crunch … choose a low-charge, low-fee card if you can't pay off your balance each month. Image: Tanya Lake

Pay attention to how you use a credit card or you could waste thousands of dollars, writes Lesley Parker.

'Tis the season to pull out the credit card (if you must). Run your finger down the monthly statistics for credit card spending and December is always the peak - and each Christmas we spend more on the plastic than we did the December before.

A decade ago we spent $8 billion on our credit cards in December. Within just five years that had doubled to $16 billion in the Christmas month. The increases continued even through the global financial crisis (we spent $20 billion on cards in December 2008) and there's every reason to think credit card spending could be about $22 billion to $23 billion this year.

About a third of that card debt won't be paid back before interest charges start accruing, possibly at a rate above 20 per cent if you've chosen the worst type of card for someone who ''revolves'' their debt.

..Asked which type of card suits which type of person and the chief executive of financial products researcher RateCity, Damian Smith, says: ''If I were to pick a person at random out of the adult population, on average they should be using a basic, low-rate credit card.''

The No.1 consideration is whether or not you carry over an unpaid balance from month to month, he says.

If you do, then you want to be paying the lowest possible interest on that debt and, at the moment, basic, no-rewards cards are charging between 10.7 per cent and 13.5 per cent a year. That compares with up to 20.5 per cent on some premium cards.

If you're confident you'll never carry over a balance, the interest rate doesn't matter because you won't be paying interest. What matters then is the fees you'll pay.

Annual fees for the cards on RateCity's database range as high as $295, with many ''rewards''-style cards huddled about the $90 mark and basic cards about the $60 mark. There are some with no annual fee.

Smith says the popular rewards card only suits a small proportion of people and leaves many out of pocket, with the costs outweighing the benefits.

The mean spending on credit cards in Australia is about $17,000 a year and the reality is that most people spend less than that, Smith says. Yet you need to spend about $60,000 a year on a card to come out on top, he says.

RateCity has estimated that if you spend $1000 a month using a typical rewards card, you'll get $101 worth of annual rewards but you'll pay $134 in annual fees.

And that's if you pay your card off in full each and every month. ''If you don't, the equation is even worse,'' Smith says.

Say you do run all your household expenses through your credit card - banking your pay on to your mortgage and then redrawing funds to pay off your carefully budgeted card spending at the end of the month - how do you choose the rewards card that's right for you?

Smith says in that case you have to consider the ''points efficiency'' of each card - a tricky thing to do, even for a professional researcher such as RateCity.

That's because cards structure their rewards programs in all sorts of ways, making it hard to compare apples with apples.

What you want to know is how many dollars of rewards you're getting per point, how wide the range of benefits is and what the benefits will cost in points.

Some cards will give you one point per dollar spent, others might give you 1.5 points or two points; then the question is, how many points are required to ''buy'' the rewards that are attractive to you?

Be aware of restrictions such as caps on the amount of points you can earn in any one year and that the points you acquire might expire after a certain time. Then there are the ''branded'' credit cards that have sprung up, such as the doubly tagged Woolworths Everyday Qantas credit card.

Smith says the key here is not to change your spending habits just to earn points.

If you spend more, or buy more expensive goods just to earn points, you're probably wiping out any benefit.

RateCity did some sums for Money to see what the result might be if you paid only the minimum required payment on your credit card.

Using a $3000 balance, a ''basic'' card interest rate of 14 per cent, and the average required minimum repayment of 2 per cent ($60 a month), RateCity estimated it would take 24 years and three months to clear the debt - and that's without considering any ongoing fees.

At this rate, the cardholder would pay about $3766 in interest - more than the debt in the first place.

At 19 per cent, the same balance would take 44 years and seven months to repay and this cardholder would fork out more than $10,000 in interest over that time.

The lesson: pay your card off in full each month but if you can't do that, pay off as much as you can.

Don't mistakenly assume that the minimum required payment is the amount needed to clear the debt in good time.

❏ If you are a high spender, consider the ''points efficiency'' of rewards programs.