How much of a difference does a higher credit card interest rate really make?
If you're taking your first steps into the world of taking on debt in order to build good credit, you will probably be having a look at signing up for a credit card. There are fees, terms, requirements and minimum repayments - an enormous amount of detail to take in all at once. And it appears that Australians are starting to get more used to debt, as a recent Equifax report tells us that credit cards are being used more every day, acting in a similar way to daily transaction accounts1.
This makes it all the more important for people to know how different interest rates will affect you. In Australia, credit card rates tend to sit between 15 and 20 per cent2, but there can be a big difference between these two extremes - and it might affect your Equifax credit report.
A question of interest
Let's say you are amongst other average Australian credit card holders, who presumably have about $4,300 of credit card debt2. With a 20 per cent interest rate credit card and a 2 per cent minimum monthly repayment schedule, it would take you 42 years to pay off that debt, and you'd end up having to shell out for $16,000 of interest3.
Meanwhile, on a 15 per cent interest rate card with similar conditions, it would only take 22 years and you'd pay $10,000 in interest. That 5 per cent difference could end up costing you thousands of dollars.
Taking control
However, while consistent repayments are good for your credit file, it might be a better idea to start making higher repayments per month. By paying $100 a month instead of the minimum $88, the debt of your 15 per cent card would be paid off in 5 years, and you'd pay only $6,000 in interest.
Minimum repayments should be a last resort for anyone who wants to take better control of their debt. Too much outstanding debt could put lenders off giving you credit in the future, so ensure you know exactly where you stand by getting your Equifax credit report today.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.
1Equifax Quarterly, Consumer Credit Demand Index, March 2016.
2Australian Securities and Investments Commission, Credit Card Debt Clock.
3Australian Securities and Investments Commission, Credit card calculator.