As credit card interest rates creep higher along with the Reserve Bank’s rate rises, 20% p.a. is becoming increasingly common and repayment costs are soaring.

As an example, a balance of $10,000 on a credit card with rates of 20.71% leads to a 2.5% minimum monthly payment of about $250. A card holder who repaid just that amount each month would require five years and nine months to discharge the entire balance. The total interest charge would be $7,126, or just over 70% of the original principal.

But if the card holder managed to repay an additional $100 each month, the duration would decrease to three years, five months and the interest charges would fall to $3,898.

According to figures released by the RBA, 72.5% of all Australian credit cards carry a balance from month to month and therefore cost the card holder interest charges.

The minimum repayment amount for a credit card is between 2–3%. Repaying just that required amount is the single most common credit card trap, as demonstrated by the above example. But a close second is using a rewards credit card with a high interest rate and annual fee when the real need is for a low interest card to pay off the outstanding balance.

Although rewards give card holders the sense of getting value for their patronage, the brutal truth is that the amount paid in interest over time outweighs the value of the rewards earned. Such cards are only worthwhile for card holders who can repay the balance in full each month.

If the credit card in the above example was replaced with one charging 10.84% p.a., making the minimum monthly payment of $250 would discharge the balance in four years, two months, with interest costs of $2,463. Adding in the additional $100 each month reduces the time to two years and eleven months, with costs of $1,619.

With credit cards as with everything else, it pays to shop around.

Source: http://www.smh.com.au/